What is annual income? — Definitions and example calculations

You make a certain amount of money each year that you have to report on your taxes. The two common terms used to describe annual income are net annual income and gross annual income. What are they, and how are they calculated? We answer these questions and more below.

What is annual income?

Annual income is the amount of money you bring home each year prior to deductions. For example, if your base pay is $45,000 per year, that’s your annual income even though your take-home pay is less after deductions.

Gross annual income: Your annual gross income is the total amount of take-home pay you receive before deductions. For example, if you get paid $5000 per month, that is your pay minus deductions, or your gross pay.

Net annual income: Your annual net income is the total amount of take-home pay you receive—it’s your gross annual income minus deductions. If you get paid $5000 per month with $400 in taxes taken out, your take-home pay, or net pay, would be $4,600.

Lenders and landlords use gross annual income to determine if the potential borrower or renter is creditworthy.

Types of gross annual income

Typically, people think of wages or salary received from a job when they think of income, though various forms of income are used to calculate one’s annual income. The different types of income can be bucketed into three primary categories:

  • Earned income: Earned income, or active income, is the income you make through receiving wages, tips, commissions, and bonuses when working a regular job.
  • Unearned income: Unearned income, or passive income, is money you make when not working. Gifts, business partnerships, property income, and retirement accounts are common sources of passive income.
  • Portfolio income: Portfolio income is sourced from investments, such as interest from savings accounts, dividends, and capital gains from stock sales.

Below are the different sources of annual income that fall into one of the above three categories.

Employment salary and wages: Employers pay employees based on their FSLA (Fair Labor Standards Act) status, which dictates if a job is considered exempt or non-exempt. Non-exempt jobs are typically hourly jobs, and exempt jobs are salaried jobs. Regardless, both salaried and hourly compensation are part of your annual income. If you work more than one job, you would add the income from both jobs to your annual income.

Pro-tip: Payroll can make mistakes when it comes to your paycheck. Be sure to check each paycheck to verify your pay is correct, as well as your deductions. 

Self-employment and independent contractor pay: Self-employment and independent contractor pay you receive from your own business, contracting for a company, or in commissions from sales are included when calculating your annual income.

Child support and alimony: If you receive court-ordered alimony or child support payments, both are considered part of your annual income.

Overtime pay: Overtime pay from your employer is considered part of your annual income.

Tips, commissions, and bonuses: Yearly income includes bonuses, including holiday and performance-based bonuses, and the commissions you get paid by your employer.

Rental property income: Any income you make from rental properties with tenants would be included in your annual income unless you’ve owned the property for six months or less.

Capital gains: Capital gains are the pre-tax earnings you make from the sale of property or an asset. The gains would be considered part of your annual income.

Interest and interest from investments: If you have investments, like bonds and stocks, or savings plans and other bank accounts that draw and pay interest, the interest payment is considered part of your yearly income.

Social security and pensions: Social security and pension payments are typically reserved for retirees, disabled employees, and families of disabled, retired, or deceased employees. Pension and social security payments would be included in your annual income.

Welfare: If you receive welfare payments from the government, it would be included in your annual income calculation.

Disability: If you receive social security disability pay, it would be included in your annual income calculation.

How to calculate annual income

Let’s say Elizabeth has a base salary of $55,000 annually. She also receives $2000 in alimony payments and a $550 holiday bonus from her employer. Adding these three amounts together, Elizabeth’s gross annual income would be $57,550.

Here are some examples broken down by how one is paid.

Monthly conversion

$7000/month X 12 months per year = $84,000 gross annual income

Bi-weekly conversion

$3000 bi-weekly X 26 pay periods per year (52 weeks/2 = 26 weeks) = $78,000 gross annual income

Daily conversion

$100/day X 260 annual working days = $26,000 gross annual income

Hourly conversion

$30/hour X 2080 working hours per year = $62,400 gross annual income

How to calculate net annual income

Net income is calculated by the following steps:

  • Calculate your gross income by adding all of your sources of income together
  • Calculate your total deductions and expenses paid out or taken out of your paycheck
  • Subtract your total deductions and expenses from your total gross income total

Using the example with Elizabeth above, let’s say she has $13,000 in annual taxes and $1500 in annual healthcare premiums taken out of her base salary, and $50 in taxes taken out of her holiday bonus. Nothing is deducted from her alimony pay. So:

($55,000 – $13,000 – $1500) + ($2000 – $0) + ($550 – $50) = $43,000 net annual income

Annual income — work with professionals to get it right

Calculating annual income can be confusing for some, and it’s something you want to get right when it comes to reporting your income on Federal and state tax returns. If you have any questions about your net or gross annual income, including what deductions are acceptable and to ensure you’re accurately capturing your information and calculations, it’s recommended you work with an accountant or financial advisor. During tax time, these types of professionals can help to make sure you’re capturing your income and deductions accurately, so you can maximize your refund amount or reduce your total tax liability due.