There are two types of annual income: gross and net. Gross income is the amount of money you make before deductions and taxes. Net income is the total amount of money you have after deductions and taxes.
If you’re looking to rent an apartment or buy a home, many landlords or lenders may ask you what your gross income is. Hearing this, you may be quick to respond with whatever money is put into your bank account from work. But, that isn’t actually what gross income is.
Gross income is one of two types of annual income. Gross annual income is the amount of money you earn before taxes and deductions. This income can come from work, or from other forms like alimony or investments. The second form of annual income is net income. Net annual income is the total amount of money you have after taxes and deductions.
It’s important to know both your gross and net income. As mentioned before, many lenders, landlords, and service providers want to know your gross income. If you’re trying to build a budget, knowing your net income makes a huge difference.
This article lays out what annual income is, the differences between gross and net income, and how to calculate annual income.
What is annual income?
Annual income is the total amount of money you earn in a year. While “year” could mean different timeframes, most companies focus on the fiscal year, which the federal government defined a fiscal year as October through September. As an individual, however, you would usually use January to December to calculate your annual income for tax purposes.
When talking about annual income, you will hear the terms gross income and net income. Both refer to your annual income, but they’re very different.
Your gross annual income is the total amount of money earned during the year before deductions are taken out of your pay. The two kinds of gross income are personal gross annual income and gross business income.
- Personal gross annual income. This is the amount you earn from your job before taxes and deductions. A personal gross annual income will be the number you start with when filing your income tax return.
- Gross business income. This income is the total amount of company sales minus the cost of goods. This number can be found on a business tax return, but is usually only used by investors.
You are offered a position with a $45,000 yearly salary. This is the total amount before taxes and other deductions are taken out. Because of that, $45,000 is your gross annual income.
Your net income is the total amount of money you have after deductions are made to your paycheck. Deductions include state and federal income taxes, Medicare tax, and social security tax. If your company provides health insurance or a retirement plan, those deductions would be taken out as well.
Because net income is the resulting number after accounting for the cost of goods sold, some businesses may refer to net income as profit.
Your annual salary is $70,000, but around $20,000 is deducted to cover insurance premiums, social security, and taxes. Because of this, only $50,000 ends up in your bank account. This makes $50,000 your net annual income.
What is gross and net monthly income?
Gross monthly income is your total amount of earnings in a month before taxes and deductions. Net monthly income is your monthly earnings after taxes and deductions.
What is adjusted gross income (AGI)?
The IRS defines AGI as “gross income minus adjustments to income.” Adjustments to income include alimony payments or money put into your retirement funds.
What is annual household income?
Household income is usually used to determine the cost of living in an area. Annual household income is the gross income of everyone above 15 years old living in the same house. Anyone who lives in the same house contributes to household income. They do not have to be related.
Types of annual income
A variety of income sources can be counted as annual income, and you need to include these earnings when calculating your gross annual income. Here are a few other forms of annual income:
- Hourly and salaried employees. Both a yearly salary and hourly wage are annual income. If you work two jobs, earnings from both jobs are calculated into your total annual income.
- Self-employment income. If you’re self-employed or have your own business, any income you earn is also considered part of your annual income.
- Social security and pensions. Yearly income also comes in the form of pensions and social security. Retired, disabled, or families of a deceased person receive these forms of income. Pensions come from a previous employer, while social security comes from the government.
- Alimony and child support. If your former spouse is court-ordered to pay alimony or child support, this payment is part of your annual income. However, note that alimony and child support are not taxable if you’re the recipient or tax-deductible if you’re the payer.
- Capital gains. Capital gains are earnings made before deducting taxes. If you sell your car or home, those earnings are part of your annual income.
- Rental income. You need to add any earnings from renting out a property into your gross annual income. The only exception is if you have owned the property for less than six months.
- Investments. Earnings or interest made from stocks, bonds, or other forms of investment is part of your total annual income.
- Welfare, disability, and unemployment. Your gross annual income includes any government-granted disability, unemployment, or welfare assistance.
- Overtime pay, bonuses, and commissions. Include any of these forms of payment — no matter how big or small — in your annual income.
How to calculate your annual income
Calculating your annual income can come in handy with taxes and budgeting. We will show you how to calculate an individual’s gross income.
While calculating your income with a salary or an hourly wage is mostly the same, there are some key differences. Because of this, you’ll find two different sections highlighting the differences in calculations (step 2 in particular).
How to calculate annual income for salaried employees
- Identify all your income sources. Before you can calculate your gross annual income, you first need to know where all of came from. It might be helpful to make a list of each of your income sources. This way, you know each one is accounted for. Aside from your normal pay, income sources include child support, overtime pay, investments, and more.
- Calculate yearly income, or gross income. If you have a salary, your yearly income is your annual salary. For instance, if your weekly income is $1,200, and your company works on a 52 week calendar year, you would multiply 1,200 by 52. This would make your annual income $62,400. Because this total is before taxes are taken out, it is your gross income.
- Total the amount from all other earnings. This may include any of the sources discussed in the list above, such as investment, unemployment, or overtime income. For example, if you earn $1,000 in investments and receive $2,500 in child support, you would add the two together and get $3,500.
- Add other earnings to your gross income. Using the numbers above, we see that we’ve made $3,500 in miscellaneous earnings and $62,400 as a yearly salary. To determine our total annual income, we will add the two together. This means our gross annual income is $65,900.
What should I put for annual income when applying for a loan?
When applying for a credit card or a loan, annual income means the total income you receive and have access to in a calendar year. This can include personal income, gifts, alimony or your spouse’s income, retirement income, income from investments, scholarships, and Social Security payments.
How to calculate annual income for hourly employees
- Identify all your income sources. Be sure to account for all wages earned outside of a formal workplace. This includes rental income, child support, disability, and more.
- Calculate your gross annual income. Take the amount of money you make per hour and multiply it by the number of hours per week you work. So, if you earn $12 an hour and work 20 hours per week, multiply 12 by 20. This equals $240. If your work is on a 52-hour work calendar, take the $240 and multiply it by 52 to get your gross income. This means $12,480 is your gross annual income from your job.
- Total the amount from all other earnings. Let’s say you earn $1,800 from a side job and $3,000 in capital gains. Adding these together equals $4,800.
- Add other earnings to your gross income. Using the numbers above, we see that we’ve made $4,800 in other income and $12,480 in hourly wages. To determine our total annual income, we will add the two together. This makes our gross annual income $17,280.
- Annual income is the total amount of money you earn in a year.
- Gross annual income is the money you make before taxes and deductions, while net annual income is the money you have after taxes and deductions.
- It is important to calculate your annual income for budgeting and tax purposes.
- Your paycheck isn’t the only income source to include in your annual income calculations. Other sources include rental income, alimony, and investment earnings.
Build a budget to last
Many people like to determine their gross and net income to help design a budget. If you’re looking for some more specific ways to budget your money, check out these ten ways to budget like a pro.
View Article Sources
- Attachment A – Section 8 Definition of Annual Income — U.S. Department of Housing and Urban Development
- Calculate Yearly Income — HealthCare.gov
- Gross Profit vs. Net Income — SuperMoney
- How to Calculate Your Adjusted Gross Income — SuperMoney
- Average Millennial Income Is Up, But At What Cost? — SuperMoney
- 10 Common Mistakes When Filing Your Taxes — SuperMoney
- Best Tax Preparation Firms | March 2022 — SuperMoney
- Tax Preparation Firms: Reviews & Comparisons — SuperMoney
Camilla has a background in journalism and business communications. She specializes in writing complex information in understandable ways. She has written on a variety of topics including money, science, personal finance, politics, and more. Her work has been published in the HuffPost, KSL.com, Deseret News, and more.