Annual Income

What is Annual Income?

Definition: Annual income is the total amount of money earned in a calendar year before taxes. It is the sum of all income perceived by an individual in that 12-month period.

What Does Annual Income Mean?

Annual income can be expressed as a gross figure or a net figure. Gross annual income is the sum of all income received from different sources during the calendar year, that means from January 1 to December 31. This amount must be figured to calculate annual taxes to be paid. Also, it is a measure employed by banks and other financial institutions to assess an individual’s ability to pay for his financial commitments.

On the other hand, net annual income is the amount of money an individual actually receives, after taxes and other deductions are taken off. The different between both, to sum up, is that gross is before any deductions are made and net is a figure obtained after deductions are discounted. The easiest way to track annual income is through bank account reports (for self-employed individuals mostly) and through salary receipts (for salaried employees).

Example

Mr. Johnson is a sales representative at Phillips Pharmaceuticals Co. a company that manufactures and sales over-the-counter medications. He currently has a salary structure with both fixed and variable items. There’s a fixed baseline salary of $1,000 a month and there’s a sales commission that varies according to the amount of money he sells plus incentives. Tax season is coming and Mr. Johnson wants to figure out how much he has to pay.

He gave his accountant all his income receipts and after he reviewed them he estimated that Mr. Johnson’s gross annual income was $42,578. Now that he has this number he can figure out how much Mr. Johnson has to pay this year and he can also compare this figure with last year’s to see how he’s doing with the company.

What Qualifies as Income?

The definition of income varies by age. For anyone over 21 years of age, income can be:

  • Personal income
  • Income from a spouse or partner
  • Trust fund distributions
  • Social Security distributions
  • Retirement Fund distributions
  • Scholarships and grants
  • Allowances and gifts

For anyone between 18-20, income can be:

  • Personal income
  • Allowances that can be verified by tax returns or other documents
  • Scholarships and grants

What is Gross Annual Income?

Personal gross annual income is the amount on your paycheck before taxes and deductions. When you accept a job offer, this is what’s listed on your offer letter or contract.

When preparing and filing your income tax return, gross annual income is the base number you should start with. If you know your gross income, you’ll have a better idea of what taxes you will either owe or be returned. Your gross annual income is also the number that’s used to qualify you for a loan or a credit card.

Gross business income is listed on your business tax return. Gross income in business is calculated as the total company sales minus the cost of goods sold. This number is what investors look at when assessing a potential company.