# What is annual income?

Your annual income indicates your value and profitability, which can support you in securing items you need for a comfortable life, like a home and credit. Calculating your gross annual income is also an important aspect of managing your personal and family finances. It can help you manage your budget, determine how easily you’ll be able to afford your expenses, and assess your level of discretionary income to spend on items like vacations and going out to eat.

In addition to your annual gross income, you’ll also need to know your annual net income. This post covers the meanings of and example calculations for each.

## Annual gross income meaning

Annual gross income is the amount of annual income you make before taxes and deductions. For example, if your employer pays you a salary of \$45,000 per year, your annual gross income is \$45,000. Or, if you’re an independent contractor who receives \$60,000 in total revenue from clients, your annual gross income is \$60,000.

Gross annual income includes any of the following forms of payment before deductions:

• Base salary
• Overtime pay
• Hourly wages
• Bonuses
• Commissions
• Tips
• Retirement funds
• Social security
• Unemployment benefit payments
• Pension payments
• Disability assistance
• Welfare assistance
• Court-ordered child support payments
• Court-ordered alimony payments
• Capital gains
• Dividends
• Interest payments on investments
• Self-employment income
• Royalties
• Freelance gig payments
• Rental property income

## Gross income calculation example

Let’s say Julia makes an annual base salary of \$50,000 and receives a \$5,000 annual bonus and \$1,000 annually in interest income. Julia adds these three amounts together to calculate her gross income. Her annual gross income is \$56,000.

## Income calculation conversions

Employees are typically paid based on an hourly, daily, bi-weekly, or monthly rate. Here are the formulas to calculate one’s gross annual income based on the payment rate for those paid on a regular schedule.

Hourly conversion

hourly rate X 2080 working hours per year = gross annual income

Daily conversion

daily rate X 260 annual working days per year = gross annual income

Bi-weekly conversion

bi-weekly rate X 26 pay periods per year (52 weeks/2 = 26 weeks) = gross annual income

Monthly conversion

monthly rate X 12 months per year = gross annual income

## Other factors influencing income calculations

For those with more complicated situations, the calculations will change to support the specific situations. For example, someone who has a part-time job, self-employment income from different clients, and interest income would use a combination of calculations to determine their total annual gross income.

## What income is excluded from gross income?

Certain types of income are not included in gross income calculations, such as tax-free investments like municipal bonds and life-insurance payouts, and tax-free benefits, such as veterans’ pension benefits. Social security benefits can be excluded in gross income calculations, as well, if the individual’s total gross income, including social security, falls below a certain threshold.

## Annual net income meaning

Annual net income, often referred to as take-home pay or adjusted gross income (AGI), is the amount of annual income you make after taxes and deductions. To calculate net income:

• Determine your gross annual income.
• Determine your total annual deductions.

## Net income calculation example

Let’s say Jim makes an annual base salary of \$70,000 and receives a \$10,000 annual bonus and \$500 annually in dividends. Jim adds these three amounts together to calculate his gross income, which is \$80,500.

Jim then adds his deductions together, which include \$20,000 in total taxes taken out of his base pay, \$2,000 taken out of his annual bonus pay, \$3,000 taken out of his base pay for his flexible savings account, and he pays \$50 in taxes on his dividends. Jim’s deductions total \$25,050.

Jim subtracts his total deductions from his gross pay to get his net pay. Jim’s annual net income, or take-home pay, is \$55,450.

## When do you need to report gross annual income?

There are many instances where your gross annual income will need to be verified or utilized, as outlined below.

For tax returns: You’ll need to calculate your annual gross income for your Federal and state tax returns to determine your tax liability. The deductions you input on your taxes will then be subtracted to calculate your annual net income.

To secure loans: Whether you’re attempting to secure a loan to purchase a car, buy a home, consolidate debt, purchase furniture, or for the many other personal reasons you might need a loan, in most instances, lenders will ask for your annual gross income. You’ll typically be asked to verify your gross income through tax returns, W-2s, or bank statements.

To secure credit cards: Similar to securing a loan, lenders will ask for your annual gross income or monthly gross income when applying for a credit card. Your gross income helps lenders determine your ability to pay your monthly bill and can affect your annual interest rate if you’re approved.

For home rental applications: If you’re attempting to rent an apartment or house, most landlords and rental agencies will want to know your gross annual income to ensure you’re able to pay your monthly rent regularly and on time. You’ll typically need to show that your monthly gross income is a certain percentage more than your monthly rent, such as two to three times more. For example, if the landlord requires your monthly gross income to be three times more than your monthly rent of \$1,000, they’ll need to verify that you make at least \$3,000 per month in gross income, or \$36,000 gross annually.

For utilities: Utility providers, such as electric, water, phone, and natural gas, sometimes ask you who your employer is and what your annual gross income is to ensure your ability to pay. Once verified, you can secure utilities when you move into a new home.

## Gross annual income, gross profit, and gross income

Annual gross income, or gross annual income, is also referred to as gross profit or gross income on income statements. Understanding how to calculate annual income and net income will support you in successfully managing your finances. It also allows you to provide the information more quickly to agencies that request it for verification purposes.