Whether you’re managing your own finances or looking to hire for your small business, calculating total income is crucial to knowing how much money you’re working with. Total income gives you a snapshot of all the money you earn before any taxes or deductions come into play.
Let’s break down what total income includes and why it matters.
What is total income?
The meaning of total income is simple: it’s the sum of all income sources before taxes and deductions. It includes an employee’s gross pay, which means wages, salaries, bonuses, and tips earned from a job. Interest, dividends, and capital gains from investments also count.
Other forms of income, such as rental income, royalties, and any other earnings, also contribute to total income. Also known as total gross income or total gross annual income, this comprehensive figure provides a clear view of your financial inflow before any subtractions for taxes or other deductions.
Knowing how to calculate your income can help you see the full picture of your income and plan better for your financial goals.
Where do you find total income?
Finding total income involves adding up all the income you receive, from every source, before taxes and deductions. Make sure you factor in income of all the following types:
Earned income.
Earned income comes from active work. This includes wages and salaries received by employees. Bonuses and commissions, often tied to performance, also fall under this category. Tips, which are common in service industries, count as earned income too. Essentially, any money an employee earns through employment or self-employment adds to earned income.
Unearned income.
Since total annual income means factoring in all income sources, unearned income comes from investments and other sources not related to active work are also included. Some examples are:
- Interest from savings accounts and bonds
- Dividends, which are payments from stocks
- Capital gains, the profit from selling investments like stocks or real estate
- Rental income from property ownership
- Royalties from intellectual property or natural resources
These income types can significantly boost total income without additional work hours.
Other income sources.
Other income sources include various payments and benefits. Some examples include:
- Alimony, which is money received from a former spouse
- Child support payments
- Unemployment benefits, which provide financial support when someone is out of work
- Social Security benefits, received during retirement or disability
When thinking about how to find total annual income, factor in these sources so that your total income reflects all financial inflows, not just those from work or investments.
How to calculate total income.
Figuring out how to calculate total gross income requires you to reflect on all your sources of income that year. Follow these simple steps to learn how to calculate income before taxes:
1. Gather all income documentation.
Start by collecting all necessary documents that show your income. If you’re a small business owner, you will need to issue W-2 and 1099 forms which detail wages and salaries to your employees. Make sure your payroll system can distribute these forms automatically for peace of mind.
Bank statements are useful for tracking interest earned from savings accounts. Investment account statements will show dividends and capital gains. Having all these documents on hand ensures you capture every source of income.
2. Calculate gross income for each source.
Depending on how many sources of income you have, this step may be as simple as having your documents ready, or a more complex process of summing up many figures from each source of income. You may find it helpful to list each source to keep your records clear. That way, you can arrive at an accurate figure for each source.
3. Sum up all income sources.
Take the gross income from each source in the prior step and add up all the different types. Begin with earned income such as wages, salaries, bonuses, and tips before moving onto unearned income like interest from bank accounts and dividends from investments.
Finally, include all other income sources like alimony, child support, unemployment benefits, and Social Security benefits. Summing all these amounts gives you a comprehensive view of your total income.
What is the difference between total income and adjusted gross income (AGI)?
Inevitably when you look up “what is total annual income?” you’ll find references to adjusted gross income (AGI). Put simply, total income includes all income sources before any deductions. You determine your AGI using your total income.
AGI starts with your total income and then subtracts specific adjustments. The IRS has a full list, but these adjustments can include educator expenses, student loan interest, and alimony payments. Other possible adjustments might be contributions to retirement accounts or health savings accounts. By subtracting these amounts from your total income, you get your AGI.
AGI is important because it determines eligibility for certain tax credits and deductions. For example, if you want to claim the American Opportunity Tax Credit or the Lifetime Learning Credit, your AGI must fall below a certain threshold. Similarly, deductions for medical expenses, charitable contributions, and mortgage interest may depend on your AGI.
How does total income affect taxes?
So what does total annual income mean when it comes to tax season? Total income is the starting point for calculating taxable income, so you need this number in order to determine the impact of taxes on your bank account.
Higher total income generally leads to a higher tax liability. The more you earn, the more you pay in taxes as you move into higher tax brackets. Deductions and credits can reduce taxable income and total tax owed.
Understanding your total income helps you plan around your tax bracket and potential deductions so that you can estimate your tax liability accurately. This way, you can make informed financial decisions throughout the year and for your business.
Get income insights to power up your business.
Having a firm grasp of total income empowers both small business owners and their employees to understand financial status and file taxes. But it can be a time-consuming and painstaking effort to sort through spreadsheets and manually calculate payroll accurately. That’s why you can rely on technology to do the heavy lifting.
With automated tax reporting and easy access to the W-2/1099 forms you and your team need in tax season, Homebase is an all-in-one tool designed to help small business owners manage hourly teams. Our easy-to-use tools help you automate payroll, track time, comply with HR best practices and labor law—and more.
Get started today with Homebase to make calculating total income a breeze for you and your team.
Remember: This is not legal advice. If you have questions about your particular situation, please consult a lawyer, CPA, or other appropriate professional advisor or agency.
