What Is Total Annual Income? A Guide for 2023
Updated · Mar 06, 2023
What Is Total Annual Income?
You often hear of it, but many people aren’t exactly sure what it is. Total annual income is the sum total of all your incomes for a given year. It includes wages, salaries, tips, commissions, and any other types of income you receive.
Simple enough, right? However, working it out can be a different story.
This number can play a significant role for tax purposes, so it's important to understand what it is and how to figure it out.
In this blog post, we’re going to go over what annual income is and how it affects you!
Different Types of Annual Income
There are different types of annual income that you may be familiar with. These include:
Annual Net Income
Net annual income is the amount of money that you take home after taxes and other deductions have been made.
This number is crucial for budgeting purposes, as it reflects the amount of money that you actually have available to spend.
Annual Gross Income
Gross annual income is the total amount of income that you earn in a year before any taxes or deductions are made.
It is important for tax purposes, as it reflects the amount of money that you have earned and may be taxed on.
Annual Family Income
Family Income or Household Income is the annual income of all the people in a household.
It affects budgeting plans, as it reflects the amount of money that a household has available to spend.
Examples of Annual Income
Annual income includes wages, salaries, tips, commissions, and any other form of income you may have.
Here’s a breakdown of many of the things that fall into these categories.
- Wages are income that you may receive from an employer. They are typically paid on a regular basis, such as weekly or monthly, and can be in the form of cash or a check.
Wages are sometimes referred to as a salary, but they aren’t exactly the same thing. Wages are calculated hourly while a salary is a set annual amount paid at regular intervals.
- Alimony and child support are forms of income that you may receive from a former spouse or child's parent. They are normally paid monthly or in rare cases yearly.
- Tips are a type of income that you may receive from customers in certain professions, such as waiters, waitresses, and bartenders.
Tips are typically given in the form of cash and are meant to be a token of appreciation for good service.
Due to their nature, a dollar here, a dollar there, you’ll have to keep careful track of them for calculating personal annual income.
- Commissions are a form of income that you may receive from selling products or services.
They are typically a percentage of the sale price and are paid in cash. Commissions can be earned by contractors or employees.
- Capital gains are a form of income that you may receive from the sale of certain types of assets, such as stocks, bonds, and real estate.
The amount of capital gain is the difference between the sale price and the purchase price of the asset. Note that cryptocurrency falls into this category, and so you’ll have to account for it carefully to include things like slippage and so on.
Capital gains are typically taxed at lower rates than the rest of your gross income.
- Pensions are generalled received from your employer or a pension fund. They are typically paid on a regular basis, such as monthly or yearly, and can be in the form of cash or a check.
Pensions may also be referred to as retirement benefits, deferred compensation, or annuities.
- Disability income is a type that you may receive if you can’t work due to a disability.
This income can be in the form of cash or a check and may be provided by a former employer or the government.
- Welfare income or social security is what you might get if you are unable to work due to broad number of reasons, for example during an economic crisis. This income can be in the form of cash or a check and may be provided by the government.
- Interest income is a type of passive income that you may receive from lending money or investing in certain types of assets.
It is typically paid on a regular basis, such as every month or every three months (quarterly). If it is paid as yearly income, you’ll often get a higher rate of interest.
- Dividend income is another type of passive income that you may receive from owning stocks or mutual funds.
It is usually paid on a regular basis, such as quarterly or yearly.
- Income from rental property received from renting out your property to others. It is typically paid on a regular basis, such as monthly or in rarer cases, yearly, and can be in the form of cash or a check.
Income from rental properties may also be referred to as rent income, rental income, or rental proceeds.
- There are other income types you’ll need to consider when calculating total annual income. They are any type of income that does not fit into one of the categories above, for examples royalties, gifts, and so on.
Note that some income types aren’t taxed, but it depends heavily on the laws in your area, or the area the income source is based in. You need to make sure of each income type, and what taxes, if any, it’s subject to.
How To Calculate Total Annual Income
There are a few ways to calculate your annual income. One way is to add up all of the wages, salaries, tips, commissions, and other forms of income that you have received in the past year.
A much simpler way is to estimate your annual income by multiplying your average—
- Monthly income by 12.
- Weekly income by 50.
- Daily income by 200.
- Hourly income by 2,000
Once that’s done you have your gross annual income. The next step is to deduct tax and other expenses. Household income is worked out in a similar way, but considering everyone in the household’s income.
No matter how you calculate your total annual income, it is important to have an understanding of what it is.
Remember when doing the calculation beforehand that it won’t include any unexpected income, such as inheritances, work bonuses, or variable incomes such as those you may pick up from side projects that generate passive income.
These will have to be declared later for tax purposes to avoid penalties.
How to Calculate Net Annual Income
Now that you have your total annual income, it’s time to calculate your net annual income, which is total annual income minus non-taxable income. Here are the most common non-taxable items.
- Welfare is paid out of taxes to people living in difficult financial circumstances. As such if you receive welfare, it won’t be taxed.
- Alimony and child support. These two types aren’t taxed because they are used for necessities.
- Healthcare payouts. This is another type of personal annual income that is vital and isn’t generally taxed.
- Gifts. Gifts are taxed in some instances. It depends on the amount the gift is worth. In the US the usual amount is $15,000 worth, annually.
- The tax on inheritances is paid by the deceased’s estate. As such the person or persons receiving the final payout won’t have to pay an additional tax.
- Rebates on purchased products. When you receive a rebate, you’re getting the money back you spent. You’re not making a profit, and so it won’t be taxed.
Note that there are more types and they often depend on your particular circumstances and the law in your state/country.
So now you know the answer to the question, “What is total annual income?”, and how to calculate your total annual income.
The types of income we've discussed in this blog post are many of the main ones that exist, but there are others.
Be sure to familiarize yourself with all of those that are relevant to you so that you can make informed financial decisions and perform an accurate annual net income calculation.
Garan is a writer interested in how tech reshapes the environment, and how the environment reshapes tech. You'll usually find him inoculating against future shock and arguing with bots.