Annual income is referred to as the earrings of an individual in one financial year. In some cases, the calculation of annual income is based on a calendar year.
The amount of annual income includes the salary, tips, commissions, bonus, dividends, interest, net income from properties, earnings from a second job, pensions, retirement funds, welfare and disability assistance, alimony and child support, etc. that is earned in that specific fiscal year before tax deductions.
Understanding annual income
The annual income includes various types of incomes for instance
1. Salary and employment income earned in one fiscal year
The employment income refers to paid wages, salary, bonus, tips, overtime pay, and commissions before the deductions are made. It also includes the full income that is generated by a person through the work that he does throughout a specific year
2. Self-employment and business income
The self-employment and business income refers to the income that a person generates through the side business he owns.
It includes sales commission, contract sales, and the money that is earned from a business that is separate from your employment with another business entity or a person.
3. Interest and income from investments
The annual income includes the income that is earned through investments that generate income, properties, sale of stocks, etc. Interest that is gained from the savings account in your bank is also included in the annual income
4. Child support payments made in a fiscal year and court-appointed alimony payment
The annual income includes the amount that you receive as part of support from the spouse as well as payment made for child support. The court must order it for three years if it is to be included in your annual income calculation.
5. Capital gains before tax
The annual income includes the amount gained from the sale of an asset. It also includes the profit that is made from the sale of stock, home, car, and product.
6. Disability and Welfare assistance
The annual income includes welfare and disability assistance. It is the amount that one receives from the government so that basic human needs can be met easily.
7. Rental income
The annual income includes the amount collected as rental income from a property that is owned for a minimum period of six months.
8. Social security and pensions
The annual income includes the amount that a person receives from pensions and social security. This type of income is meant for employees that are disabled or who have retired from service.
It also includes the families of disabled, deceased, and retired people
Types of annual income
There are two types of annual income, and it is essential to know about them so that it becomes easy for a person to understand the concept of how to calculate annual income. The annual income includes-
1. Net Annual Income
The amount of income that is left with an individual after paying taxes is known as net annual income. It is the amount that is written on your paycheck and which a person receives.
How to calculate net annual income is an essential component because this is the amount left behind as living expenses and is used to make a budget. For a business organization, the net income calculation is the amount of profit that is left with a person after paying all the operating costs.
The net income is also referred to as net earnings and appears in the income statement of a company.
2. Gross Annual Income
The annual income that an individual has earned before paying the tax is termed as gross annual income. It includes income from all the sources, for instance, income received in cash as well as services and properties received.
The annual income is the amount that is listed in the contract or job offer. Gross income is used during the filing of the income tax return and when you want to qualify for a loan or a credit card against your income.
For a business organization, the gross income is the amount that the investors look for if they are assessing a potential company. If you are looking for how to calculate gross annual income, then take the help of a simple formula:
Total company sales – the cost of goods sold.
The gross income is also referred to as gross earnings and appears in the income statement of a company. One should know about it before a person learns about how to calculate annual income.
Importance of annual income
The importance of annual income calculation is-
- The annual income is considered one of the best indicators of the financial health of an individual.
- It has a direct impact on purchase decisions as well as the standard of living.
- An estimate about your annual income helps to create a budget
- It is easy to identify your expenses and understand what and where the money is spent on
- A steady and consistent annual income is a blessing if an individual is looking for a mortgage
- Before approving a loan, the moneylender calculates the debt-to-income ratio by looking at the annual income.
- The annual income is one of the most critical factors in preparing annual tax returns
- It is a must for applying for a personal loan
- it is not possible to apply for a credit card without giving your annual income figure
How to calculate annual income
The calculating process of annual income is dependent on the number of times an individual is paid during one fiscal year. A simple formula is used for this purpose, and it includes
Hourly: Multiply by 2000
Weekly: Multiply by 50
Daily: Multiply by 200
Monthly: Multiply by 12
How to calculate the annual income of a wage earner who earns hourly
When an individual is paid by the hour, he is known as the wage earner. His paycheck is dependent on the number of hours he has worked and often varies from week to week.
Suppose an individual is paid 20 dollars per hour, and he has worked for 40 hours every week.
Total number of hours per week = 40
Amount earned every hour = 20
Weekly salary = 40 * 20 = 800 dollars
Total number of weeks in one year = 52
Annual salary = weekly salary * total number of weeks
Annual salary = 800 * 52
Annual salary = 41,600 dollars
When the same individual works uneven hours, then his annual salary will be calculated after determining the number of hours he works every week, then month to get an average number of hours.
Total number of hours worked in first week = 40
Total number of hours worked in second week = 45
Total number of hours worked in third week = 35
Total number of hours worked in fourth week = 40
Total number of hours worked = 40 + 45 + 35 + 40 = 160 hours
Amount earned per hour 20 dollars
Annual salary = 160 * 20 * 52
Annual salary = 166,400 dollars
How to calculate the annual income of a salaried employee
An individual who receives a fixed amount as his gross pay is known as a salaried person. It has no link with the number of hours instead is dependent on the number of pay periods per year.
The pay stub lists total earnings or gross income. It offers information related to deductions like local, state or federal taxes, medicare contributions, social security, retirement savings plan, insurance premium, and flexible spending accounts. The net salary which a salaried employee takes home is his gross salary less than all the deductions. It also includes all the overtime that an employee has worked.
It is employers who choose the payroll schedule of their employees. It can be
- Weekly paycheck paid per week and included a total of 52 paychecks in 1 year
- Bi-weekly paycheck paid per 2 weeks and included a total of 26 paychecks in 1 year
- Monthly paycheck paid at the end of every month and included a total of 12 paychecks in 1 year
- Semi-monthly paycheck paid on 1st and 15th of every month or 15th and 30th of every month and includes a total of 24 paychecks in 1 year
Suppose an individual is paid 500 dollars per week then his annual salary will be
Annual salary = weekly paycheck * total number of paycheck
Annual salary = 500 * 52
Annual salary = 26000 dollars
How to calculate annual income if he is paid the same amount bi-weekly
His annual salary will be
Annual salary = bi-weekly paycheck * total number of paycheck
Annual salary = 500 * 26
Annual salary = 13000 dollars
If he is paid the same amount monthly, his annual salary will be
Annual salary = monthly paycheck * total number of paycheck
Annual salary = 500 * 12
Annual salary = 6000 dollars
How to calculate annual income if he is paid the same amount semi-monthly
His annual salary will be
Annual salary = semi-monthly paycheck * total number of paycheck
Annual salary = 500 * 24
Annual salary = 12000 dollars
It is essential to have a fair idea of the full annual income for both individuals as well as business entities.
When you are unsure about how to calculate the annual income, you can go on a spending spree, whereas knowing how to calculate the annual income helps to make plans and create a budget so that you can lead a life without unnecessary hassles.