What is Annual Income - A Full Guide
When you apply for a job, it is easy to get confused by the salary. Different companies state their starting salaries using different jargon, and some companies will neglect to state the salary all together. Instead simply calling it “competitive”.
With some companies paying by the hour, others offering a weekly wage, and others offering 4-weekly pay, it can be tricky to understand exactly what annual income is. But as the name suggests, annual income simply refers to the income that you will make in a single year.
Of course, things are never that simple. There are some things that aren’t included in your annual income, and this is what can cause confusion when it comes to calculating it. In this guide, we’re taking a look at what annual income is, and explaining how to calculate it.
So if you want to find out more, keep on reading!
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What is Annual Income?
So, let’s dive right in and take a look at what annual income is. As we have said, annual income refers to the money that you will make during a year that can be declared as income. Income can include a number of different things, such as wages, pension payments and dividends too. Things such as bonuses from your employer, tips from customers, and overtime for extra hours you have worked will also contribute to your annual income.
Annual income is often referred to as two different things: gross annual income and net annual income. Just like with any sort of income, gross annual income refers to your earnings before any tax is paid, whereas net annual income refers to the money you take home after tax and other deductions.
Where annual income differs slightly is that this isn’t a term only used by individuals for their personal finance, annual income is also used by companies. So the term “gross annual income” could be used to refer to the profit that a company generates in a year. That is why it is important that you are familiar with this term, not only for your personal finances but for business finances too.
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How Do You Calculate Annual Income?
As we have just said, annual income is calculated across a number of different income streams. Not only does it include income generated through labor, products or services, but it also includes dividends paid by shares you have in other companies, bonuses from higher-ups and tips too. There are a lot of different things to take into account when calculating annual income, and this might have you wondering “how do you calculate annual income?”
Well, that’s a very good question. Thankfully, calculating annual income on an individual basis is incredibly simple. No matter whether you only know your hourly rate, daily rate or weekly rate, you can calculate your annual income with just these numbers, and the number of hours you are contracted to work.
For example, the average weekly hours that a single individual will work is 40 hours a week (an average of 8 hours per day, 5 days a week). If you calculate this across an average of 50 weeks (giving time for unpaid sickness), then this works out as an average of 2,000 hours a year. So to calculate your annual income based on an hourly rate, you simply need to multiply it by 2,000.
Use the following formulas to calculate your annual rate:
(hourly rate) x 2,000 = annual rate
(daily rate) x 500 = annual rate
(weekly rate) x 50 = annual rate
(monthly rate) x 12 = annual rate
(4 weekly rate) x 13 = annual rate
Simply substitute the relevant information and multiply it to calculate your annual rate. Of course, it is worth noting that this will not take into account bonuses, over time or tips. These will all need to be added at the end to calculate your actual annual rate.
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What Does Annual Income Include?
Before we take a look at why you should calculate annual income, let’s take a look at some of the things that are included in annual income that you may need to add on at the end.
Overtime pay, commissions, tips, and bonuses.
Social security payments and pension payments.
Court-order child support or alimony payments.
Net income generated from a second job/side business.
Interest, dividends, and income earned from properties.
Most of these factors will not be considered when it comes to calculating your annual income based on the formula we supplied earlier. So, to get a true reflection of your personal annual income, these factors will need to be added to the annual rate that you calculated earlier based on your annual hours alone.
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Why Should You Calculate Annual Income?
So why should you calculate your annual income? Well, the main reason why you should do this is because knowledge is power. Without the knowledge of your annual income, you will never be able to make good financial decisions. You need to know your annual income in order to determine where your money is going and where you should be putting it.
Of course, the only reason to calculate annual income isn’t for your own knowledge, it is helpful to have this information for others too. If you are somebody who is thinking of applying for a mortgage, then mortgage lenders will ask for your annual income. The same goes for any form of credit. This is why it is very important that you know this information.
In terms of making healthy financial decisions for yourself, knowing how much money you have coming in every single year is essential! Use the formulas above to easily calculate how much money you earn in a year.
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In short, annual income is calculated by looking at your hourly, weekly, or monthly rate and multiplying this so that it can be substituted into a year. Then adding any additional income, from childcare payments or overtime, on top.
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Thank you for reading!