How To Calculate Annual Income: A Complete Guide + Examples

Whether you’re hiring for your small business or managing your own finances, knowing how to calculate annual income is a key step to understanding what you have to work with. However, annual income isn’t just about salary. It includes all sources of income, such as bonuses and investments.

This guide will break down what annual income is and how you can calculate it accurately, ensuring you have a solid foundation for all your financial decisions.

What is annual income?

Annual income is the total amount of money you earn in a year. It includes all sources of income, such as salary, bonuses, commissions, and investments. There are two kinds of annual income: gross and net, which we’ll define below.

Understanding annual income helps you manage how much money you have to work with. If you’re a small business owner, it also helps you budget for the total cost of employing someone, employee compensation and ensure you’re compliant with labor laws and regulations. 

TIP: For a detailed understanding of how to calculate your gross income, check out this guide on gross pay calculation.

What is the difference between gross and net annual income?

Understanding the difference between gross and net annual income is crucial for effective financial planning. Knowing how much you earn versus how much you actually take home can help you budget better and set realistic financial goals.

Gross annual income is the total amount of money an employee earns in a year before taxes and other deductions. It includes all sources of income, such as salary, bonuses, commissions, and investments. 

For example, if you have a salary of $50,000, receive a $5,000 bonus, and earn $2,000 from investments, your gross annual income would be $57,000. This figure represents your total earnings without any subtractions.

Net annual income, on the other hand, is the amount you take home after all taxes and deductions. These deductions can include federal and state income taxes, Social Security, Medicare, health insurance premiums, and retirement contributions. 

If your gross annual income is $57,000 and you have $12,000 in total deductions, your net annual income would be $45,000. This is the actual amount you have available for spending and saving.

TIP: For a deeper dive into the components of your pay, explore this beginner’s guide to pay rates.

How to calculate gross annual income.

Calculating gross annual income accurately can be a bit daunting, especially when you have multiple income sources. Here’s how to break it down with an annual income example:

1. Calculate annual salary.

To calculate your annual salary, start by determining your hourly wage. Multiply this wage by the number of hours you work each week.

For example, if you earn $20 per hour and work 40 hours a week, your weekly earnings are $800. Next, multiply your weekly earnings by 52 weeks to get your annual salary. Using the example, $800 × 52 weeks  = $41,600. This figure represents your annual salary before any deductions.

TIP: Use this hourly salary calculator to simplify the process of calculating your gross pay.

2. Factor in other income sources.

Your annual income isn’t limited to your salary alone. Include any additional sources of income such as bonuses, commissions, and other earnings. 

If you receive a $5,000 annual bonus and $2,000 in commissions, add these amounts to your annual salary. Continuing with the previous example, $41,600 (annual salary) + $5,000 (bonus) + $2,000 (commissions) = $48,600. This total represents your gross annual income.

TIP: Learn how to pay yourself as a business owner to ensure all your income sources are accurately accounted for.

3. Convert monthly income to annual.

Is annual income monthly or yearly? The final number is yearly, so if you receive income on a monthly basis, you need to convert it to an annual figure. 

Multiply your monthly income by 12 months. For instance, if you earn $3,500 per month, multiply this amount by 12. The result, $42,000, is your annual income from that source. If you have multiple monthly income streams, repeat this process for each one and sum the totals.

Knowing how to calculate annual income from biweekly pay follows the same principles—just swap out the 12 months for 24 biweekly periods. By following these steps, you can accurately calculate your total annual income, considering all sources and payment frequencies.

TIP: For more insights on managing multiple income sources, explore these stress-free finance tips for small businesses.

How do you calculate annual salary from hourly wage?

Start with your hourly wage and multiply that number by the number of hours you work each week. This will give you your weekly earnings. Then, multiply your weekly earnings by 52 weeks to get your annual salary. Hourly wage × # of hours worked each week × 52 weeks = annual salary. 

Many small business employees are paid hourly, so the majority of your annual income calculation will come from hourly wage. 

What are the types of income deductions?

Now that you know how to calculate gross annual income, you need to factor in deductions. Deductions can come in several forms, but knowing what to expect can help you plan better and avoid surprises.

Pre-tax deductions

Pre-tax deductions come out of your gross income before taxes are applied. These deductions lower your taxable income, which can reduce the amount of taxes you owe. Common pre-tax deductions include:

• Health insurance premiums: If you participate in an employer-sponsored health insurance plan, the premiums are typically deducted from your paycheck before taxes. This means you pay less in federal income taxes because your taxable income is lower.
• Retirement contributions: Contributions to retirement plans like a 401(k) or 403(b) are often made with pre-tax dollars. This not only helps you save for the future but also reduces your current taxable income.
• Flexible spending accounts (FSAs): FSAs allow you to set aside pre-tax dollars for medical expenses or dependent care. The money you contribute to an FSA is not subject to federal income tax, Social Security tax, or Medicare tax.

Post-tax deductions

Post-tax deductions are taken from your income after all taxes have been applied. These deductions do not reduce your taxable income but are necessary for various financial obligations. Common post-tax deductions include:

• Federal and state income taxes: These are mandatory deductions based on your income level and filing status. Federal income tax rates are progressive, meaning the rate increases as your income increases. State income taxes vary by state, with some states having no income tax at all.
• Social Security and Medicare taxes: Also known as FICA (Federal Insurance Contributions Act) taxes, these fund Social Security and Medicare programs. The Social Security tax rate is 6.2% on income up to a certain limit, while the Medicare tax rate is 1.45% on all earnings. High earners may also be subject to an additional Medicare tax.
• Other post-tax deductions: These can include garnishments for child support or alimony, union dues, and other voluntary deductions like charitable contributions or loan repayments. These deductions are taken from your net income and do not affect your taxable income.

TIP: Understanding payroll taxes can help you better manage your post-tax deductions.

How do income deductions impact annual income?

Income deductions play a significant role in determining your net annual income, but it’s important to understand the difference between pre- and post-tax deductions.

Since pre-tax deductions come out of your gross income before taxes are applied, they lower your taxable income, which in turn reduces the amount of taxes you owe. For example, if you contribute to a 401(k) plan, the amount you contribute is deducted from your gross income, lowering your taxable income and reducing your tax liability. 

Post-tax deductions are taken from your income after all taxes have been applied, so they directly reduce your net annual income. For instance, after your taxable income is determined, federal, state taxes, and Social Security and Medicare taxes deducted from your paycheck reduce your take-home income. 

How to calculate net annual income with deductions. 

Calculating your annual income with deductions builds on our earlier guide about gross annual income. Here’s how to calculate yearly income to find your actual take-home pay:

1. Determine gross annual income.

Start by calculating your total income from all sources. This includes your salary, bonuses, commissions, and any other earnings like investments or side gigs. Take our earlier example, where you have a salary of $50,000, receive a $5,000 bonus, and make $2,000 from freelance work. Your gross annual income would be $57,000.

TIP: Learn how to calculate MAGI to ensure you are accounting for all income sources accurately.

2. Identify pre-tax deductions. 

Next, sum up all pre-tax deductions. Common pre-tax deductions include health insurance premiums, retirement contributions, and flexible spending accounts (FSAs). If you contribute $3,000 to a 401(k) and pay $2,000 in health insurance premiums, your total pre-tax deductions are $5,000.

TIP: For more on how pre-tax deductions can affect your income, read this guide on adjusted gross income.

3. Calculate taxable income. 

Subtract your pre-tax deductions from your gross annual income to find your taxable income. Using the previous example, subtracting $5,000 in pre-tax deductions from a gross income of $57,000 leaves you with a taxable income of $52,000. This is the amount on which your taxes will be calculated.

4. Determine post-tax deductions. 

Calculate federal, state, and local taxes based on your taxable income. Use current tax brackets to determine how much you owe in federal and state taxes. 

For instance, if your taxable income is $52,000, you might owe $6,000 in federal taxes and $2,000 in state taxes. Also, include Social Security and Medicare taxes, which are typically 6.2% and 1.45% of your income, respectively. For $52,000, Social Security would be $3,224 and Medicare would be $754.

Add other post-tax deductions like garnishments or union dues. If you have $1,000 in union dues and $500 in garnishments, include these in your calculations. Summing up all post-tax deductions ($6,000 + $2,000 + $3,224 + $754 + $1,000 + $500) gives you $13,478.

TIP: For more insights on managing payroll taxes, explore this guide to state payroll taxes.

5. Calculate net annual income. 

Subtract post-tax deductions from your taxable income to find your net annual income. Using the example, subtract $13,478 in post-tax deductions from $52,000 in taxable income. This leaves you with a net annual income of $38,522. This is the amount you actually take home after all taxes and deductions.

Bonus: 5 tips for maximizing your annual income. 

Now that you know how to calculate yearly income, how can you make the most of your finances? Here are a few things to do after you learn how to figure out annual income: 

• Negotiate your salary: Research market rates for your position, including using job postings, to understand the average salary in your industry. During job interviews or performance reviews, highlight your accomplishments to justify a higher salary, and be prepared to discuss alternatives like bonuses or additional benefits. 

• Contribute to retirement accounts: Since retirement accounts like a 401(k) or IRA help you reduce your taxable income, aim to contribute the maximum allowable amount to these accounts. In 2024, the IRS permits $23,000 for 401(k)s with an additional $7,500 if you’re over 50. This also sets you up for a substantial retirement fund over time. 

• Use pre-tax benefits: Any pre-tax benefits like health insurance premiums, flexible spending accounts (FSAs), and health savings accounts (HSAs) reduce your taxable income, so enroll in these programs if available at your employer. If you’re a small business owner, offering these benefits can be attractive to new employees or help with retention. 

• Claim eligible tax deductions and credits: Calculate items such as mortgage interest, student loan interest, and charitable donations, as well as tax credits like the Earned Income Tax Credit (EITC) and Child Tax Credit to reduce the amount of taxes you owe. 

• Seek professional advice: Consulting a financial advisor or tax professional can help you maximize your annual income, especially if you’re juggling all the details of a small business. 

TIP: For more insights on financial planning, check out this guide to employee financial wellness.

Make payroll painless with Homebase. 

Having a firm grasp of your annual income helps you make the financial decisions that best benefit you, your team, and your business. But the process of actually getting all the numbers right and factoring in relevant deductions and compliance doesn’t have to cause a headache.

At Homebase, we provide you with the tools and resources to simplify payroll management, streamline financial planning, and ensure accurate income calculations. Let us help you take control of your financial future. Get started today.