Reporting taxes, applying for a loan and making a new company budget will require you to know how much money you bring in each year.
Annual income is one of the most valuable metrics for quick, comprehensive calculations to determine this.
This article will explain what annual income is, why it’s important and how to calculate it using several variations of the core formula.
In a nutshell, annual income is the amount of money you make in a year. You can calculate annual income for yourself, like your family’s joint finances or for a business.
In any case, annual income is the total amount of money you earn over one standard year or your annual salary.
Annual income can include various income and revenue sources depending on how you calculate it. In most cases, annual income is calculated between January 1 to December 31 of the same year.
Alternatively, you may calculate annual income for a business’s fiscal year. The standard fiscal year runs from October 1 to September 30, although this can vary from company to company.
Regardless, annual income is critical for calculating hourly wages and determining income taxes and payments, especially for self-employed individuals.
What’s included in annual income?
Annual income can include a variety of figures and sources of income.
Generally, annual income includes:
- Your base salary and other employment income include tips and overtime pay. It includes everything from biweekly or monthly deposits into your bank account. If calculating for a business, this includes all the money a company brings in from selling products or services.
- Social Security and pension income.
- Welfare money and disability assistance.
- Court-ordered alimony or child support.
- Interest and income from investments, like stocks.
- Capital gains before tax deductions.
- Rental property income.
When calculating annual income for yourself, try to include any source of income that contributes meaningfully to your monthly budget, no matter its source. Note this is gross pay or earned income, not the money you have left after deducting for healthcare and groceries.
As a business owner, you’ll want to include all of your revenue plus any income your business receives from investments, loans from lenders, savings accounts or other bonuses.
What’s the difference between gross annual income and net annual income?
Gross annual income is similar to net annual income, though there are some differences between these types of income to keep in mind.
Your gross annual income is your annual taxable income. This is the amount of income you receive before taxes or deductions; if your only source of income is a yearly salary, this number reflects your pre-tax income.
Generally, banks calculate gross annual income to determine whether they will approve you for a loan, credit card or some other financial instrument.
Gross net income, on the other hand, is your annual income after you deduct taxes and other expenses. Calculating gross net income for yourself will be the income you have left over after living expenses.
As a result, adjusted gross income is significant when determining your overall budget.
How do you calculate annual income?
Calculating annual income is reasonably straightforward. Let’s take a closer look at how you can do it.
List income sources
First, tally up all of your different income sources. If you are calculating your personal annual income, you’ll want to tally up your Social Security and job income.
If you are calculating a business’s annual income, be sure to account for every source of revenue or income stream the company has under its belt.
Calculate yearly income by hour, day, week or month
Now, you must determine whether you will calculate annual income by hour, day, week or month. For example, say you want to know how much money you’ll make at a job once you know its projected hourly rate.
Good news — calculating annual income by any of these metrics is quick and easy.
To convert your income to annual income, follow the below formula:
- Hourly: Multiply your hourly rate by 2000.
- Daily: Multiply your daily rate by 200.
- Weekly: Multiply your weekly rate by 50 (since there are 52 weeks in a year, you’ll assume you get two weeks off for vacation).
- Monthly: Multiply your monthly rate by 12.
As you can see, calculating your annual income as a person is relatively easy.
But what if you need to calculate the annual income of a business? In that case, take the average daily, weekly or monthly income and follow the above formulas. For example, if your business brings in $10,000 per month, you can expect it to accumulate about $120,000 annually.
Example of annual income calculation
Let’s take a closer look at annual income by examining an example.
Say you wish to calculate your annual income, and your employer says you will make $25 per hour at a new job. Assuming you put in eight working hours per day, five days per week and 50 weeks per year, you can calculate your annual income with any of the above time metrics.
Here’s a breakdown:
- $25 x 2000 = $50,000.
- $$200 x 250 = $50,000.
- $1000 x 50 = $50,000.
- $4167 x 12 = $50,000.
As you can see, your calculated annual income is the same. All you changed was which time scale you used for the calculation.
Why is annual income important?
Annual income is significant for various reasons, whether you are calculating it for personal reasons or your business.
Therefore, you should keep track of it and regularly calculate it if you receive a pay increase, if your business gets many more customers and if there are any other massive changes in your income streams.
Making a budget
For starters, you can and should calculate annual income to determine budgets.
For example, if you want to know how much spending money you have each week, calculating your annual net income (that is, calculating your yearly income and then deducting your expenses and living costs) will help you determine how much money you can spend freely without feeling bad.
Similarly, you must make a budget to determine your average annual income if you have a business. Once you know that number, you can decide things like employee salaries and how much money you can spend on expansion.
Determining business finances
On a broad scale, annual income is an essential metric for determining your business’s finances and overall financial health. For example, if your annual income is very healthy and high, it might be time to scale up your brand and open another store.
But if your annual income is projected to be relatively limited, you may need to consider other business decisions.
For instance, you might try to increase your product offerings or save money in other ways. Regardless, annual income gives you the critical information to start taking positive steps and building a brighter financial future for your brand.
Deciding on a purchase
Annual income further allows you to decide whether to buy something as a person or a business.
Say you want a new vehicle, but your annual income is only $70,000. You should calculate your net annual income to know how much money you have left over after your necessary expenses, like rent and insurance.
If you have a few thousand dollars left over, you could determine you have enough to pay for a new car monthly.
Alternatively, you might figure it’s wiser to save money over time and wait until you have a larger lump sum to reduce your monthly payments on that future vehicle.
In any case, annual income gives you more information about how much you can expect over the year, helping you plan your big purchases and other major financial decisions wisely.