How to Calculate Your Annual Income

When it comes to personal finances, knowledge is power. Understanding where we stand financially is a starting point for building a brighter financial future. 

Knowing your annual income is important for applying for loans, filing your taxes, and other key personal finance tasks. But what’s annual income, exactly, and how do you calculate it?

What’s annual income?

Annual income is the amount you earn in a year. In most cases, this is in one calendar year — January 1st to December 31st.

However, it’s not just your salary or wages from your job. Annual income can include any or all of the following:

• Wages or salary from a job

• Tips, bonuses and commissions from a job

• Income from a side hustle or second job

• Net income from a business

• Net income from freelancing or contracting

• Interest or dividends from savings and investments

• Net income from a rental property

• Income from social security, pensions or retirement distributions

• Income from welfare or disability payments

• Income from child support or alimony payments

Annual income includes all your income from various sources — not just your main job. 

Some sources of income will come with a tax form listing exactly how much you made in the previous year. For example, you will receive a W2 tax form from your employer each year that lists the amount you earned in wages, bonuses and tips. 

However, some other sources won’t necessarily be listed on a tax form. You’ll have to calculate your own business profits, for example. 

Why does knowing your annual income matter?

Knowing your annual income is important for several reasons, including:

Applying for a loan: Whenever you apply for a loan or credit card, you will be asked for your annual income. The lender uses this information to calculate how much they are willing to lend you. 

Filing taxes: When you file taxes each year, you’ll have to list all your income from various sources. 

Alimony/child support: For court-ordered payments like child support or alimony, your annual income must be provided to calculate the payments you may owe. 

Building a budget: Most budgeting strategies start by calculating your monthly income so that you can determine how much you can afford to spend each month. Knowing your annual income and dividing by 12 is a good way to calculate your average monthly income. 

Knowing your annual income is also one way to measure your progress when it comes to personal finances. Just like calculating your total assets and net worth, tracking how your annual income changes over time can give you a good idea of if you’re progressing. 

What is net annual income?

Net annual income is your annual income after taxes and deductions. It’s the amount of income you actually get to use after the government gets its cut.

Net annual income is generally calculated once per year, after you file your taxes. After you calculate all your deductions and determine your tax liability, you’ll know your true net income for the year.

You can also get an estimate of net annual income by looking at your paystubs. On each paycheck, you’ll see your gross income (before taxes), then you’ll see the various taxes that come out of your paycheck. 

To get a rough estimate of your net annual income, take your paycheck amount and multiply by the number of pay periods in a year (26 if you’re paid every two weeks). Keep in mind this won’t be fully accurate, and it won’t include income from other sources. 

What is gross annual income?

Gross annual income is your total income before any taxes or deductions. 

Salary amounts are advertised in gross terms. So if you accept a job offer with a $40,000 salary, that $40,000 is your gross income. Your net income (after taxes) will be lower.

Gross annual income is usually the starting point for making calculations. Gross income is also the amount you’ll list on loan applications. 

How do I calculate annual income?

Calculating your annual income involves adding together all your various sources of income. 

You’ll start by calculating your gross annual income. Often, you’ll need to start with your monthly or bi-weekly income, and then calculate the annual amount from there. You can use an annual income calculator, or calculate your income manually. 

For instance, if you receive bi-weekly paychecks of $2,000, you would multiply this number by the number of pay periods in a year (typically 26). This would result in a gross annual income of $52,000. 

Then, you would add up your income from other sources and add those amounts to your salary income.

Here’s an example:

• Jai receives paychecks of $1,400 every 2 weeks (26 paychecks per year)

• Based on this, he calculates his salary earnings at $36,400 per year

• Jai also works a side hustle that earns him $500 per month

• Based on this, he calculates his side-hustle earnings at $6,000 per year

• Considering both sources of income, Jai calculates his gross annual income to be $42,400 

Self-calculating your income is appropriate for applying for a loan, but when it comes to filing your taxes, it’s wise to consult a professional.

Bottom line

Annual income is simply the total amount of money you earn in a year, considering all your various income sources. Gross income is the total amount, while net income is the amount after taxes and deductions. 

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