What Does Annual Income Mean?
Annual income, as the name suggests, is the amount of income that you make in one fiscal year.
It is made up of everything from your yearly salary, bonuses, overtime, freelance payments and tips (among other things).
There are two forms of annual income - gross annual income and net annual income. This article will show you how to calculate and break them down further.
What does annual income mean
Different types of income
Calculating annual income
So, What is Annual Income?
The term annual income refers to how much income you earn in one fiscal year before any deductions are made for taxes.
The term itself is very explanatory - annual means year and income means the money that you make.
You typically need to calculate both your gross annual income and net annual income to help with things like creating a budgeting plan, paying your taxes, applying for loans, or proving legal payments, such as alimony or child support.
What Does Your Annual Income Include?
Your annual income can include money from a number of different sources:
Payments from work, such as wages, salary, overtime pay, commissions, bonuses, and tips before any deductions, for tax, or pensions, etc.
Any social security payments, retirement funds, or pensions.
Welfare or disability assistance from the state.
Court ordered payments, such as child support and alimony.
Your net income from operating a business, side hustle, or a second job.
Interest/dividends from investments, or any other net income from properties.
What is Net Annual Income?
Your net annual income is your total income after deductions for taxes and other costs.
This is the figure that you would use to calculate your budget to help pay for things like rent, utilities, food, and transportation.
In a business, net income is also referred to as profit - as it is the money that a company has made after they have paid for all of their operating expenses.
What is Gross Annual Income?
Your personal gross annual income is the amount of money that you make in a fiscal year, before any taxes or other deductions.
When you are preparing to file your income tax return, your gross annual income is the base number that you should start with.
This will give you a better idea of what taxes you owe, or what will be returned to you.
You will also use your gross annual income number to qualify for a loan or credit card from your bank.
If you are a business owner, gross business income is quite similar, it will be listed on your business tax return.
It is calculated as the total monetary value of your company sales, minus the cost of all of the goods and services that you have sold.
This is an important number for investors, and they will look at your gross annual income as an indicator of your business’s success and potential.
What is Household Income?
Your household income is the total gross income for all members in your household. The individuals do not have to be related in order to make up your household income.
Usually, banks and other lenders will assess the risks and base how much they will lend you off of your total household income.
How to Calculate Your Annual Income
Working out your gross annual income is usually pretty simple, and you can use an easy formula to calculate it.
Convert your hourly, daily, weekly or monthly wages (depending on how frequently you are paid) into their annual value.
Do note that our version of the formula assumes that you are on a fairly standard contract, where you work an average of 40 hours a week, 50 weeks a year.
If you are paid hourly, multiply this rate by 2000 (or your number of hours worked, if not on a standard contract).
If you are paid daily, multiply this rate by 250 (or your number of days worked, if you are not on a standard contract).
If you are paid weekly, multiply this rate by 50 (or your number of weeks worked, if you are not on a standard contract).
If you are paid monthly, multiply this rate by 12 (or your number of months worked, if you are not on a standard contract).
Why is Calculating Your Annual Income Useful?
Both your annual income and the annual income of your household in total, are good indicators of your financial health.
This has a big impact on your lifestyle and your purchasing decisions, as well as giving you an idea of what loans or grants you will be successful in applying for.
You should be informed about the money that you have coming in each year, so that you can create an accurate budget, set up a savings plan, identify expenses, and understand where and what to spend your money on.
Without a clear picture of your annual income, you could be living beyond your means which would affect you in the future.
If you are wanting to purchase a house, mortgage lenders will look at your annual income, but won’t focus on it exclusively, as they will want to see that you have earned a steady income over the last two years.
The consistency of your annual income (alongside other factors, such as your debt to income ratio, will inform lenders about how you will be able to make regular payments and the risk that they would take when lending to you.
Wrapping Up | What does annual income mean
Knowing your annual income can save you a lot of time, hassle, and stress, especially when it comes to things like applying for personal loans, a new credit card, a mortgage, or filing your annual tax return.
Regardless of whether you are an employee or a business owner, you should always be aware of your annual income, so that you can assess your own financial health and the health of your business finances.
We hope this helped - best of luck with your budgeting!
Title: What does annual income mean?
Category: Career Resources
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