What Is Annual Income and How Do You Calculate Yours?
Updated 7 May 2023
Understanding your annual income can help you budget for expenses and manage your money better. Annual income considers income from all sources, so calculating it is the best way to determine your yearly earnings. Calculating your own annual income is a great way to improve your financial management and literacy. In this article, we explain what annual income is, what it includes and how to calculate it.
What is annual income?
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As you begin or advance your career, you may wonder, 'What is annual income?' Annual income is the total income you earn in a year. You can base your annual income on a calendar year or a financial year. The calendar year runs from the 1st of January to the 31st of December in a single year. The financial year runs from the 1st of July to the 30th of June the following year.
You may calculate your annual income to apply for a loan or credit card or file your annual tax return. In these cases, you calculate your annual income based on the financial year. The amount of annual income you have tells creditors, such as banks and credit card companies, how likely you are to repay any credit. They assess your annual income and determine whether they think you're likely to afford your repayments. If they decide to extend credit, your annual income also determines the amount of money they lend you.
What is the difference between gross and net income?
Gross income is the income earned during a year. This amount is subject to deductions, such as income tax. When someone asks for your annual income, they usually refer to the gross amount. Your gross income can also help you compare your earnings to other people. If you learn your gross income is much lower than your colleagues, you may use this information as an incentive to negotiate for a higher salary or seek a higher-paying position.
Net income is the amount you receive during a year. It is the gross income, minus any deductions. An individual's net income is the gross income minus tax payable and allowable tax expenses, such as the cost of uniforms and charity donations. A business's net income is the gross income minus its business deductions, including tax payable, running costs and wages.
What does annual income include?
Annual income includes all income received during a 12-month period. To accurately calculate your annual income, you can include all the income you receive. Keeping thorough records of all income you receive can help you calculate your annual income. You may keep electronic records or save hard copy documents, including payslips and paid invoices. Many people keep a combination of both kinds of records. Keeping accurate records can also help you prove your annual income if you're ever audited. The Australian Tax Office requires all taxpayers to keep financial records for at least five years.
Here are the types of income factored into annual income:
Employment income: income earned as an employee, including your salary and wages, overtime payments, bonuses and commissions before any deductions
Self-employment income: income generated by a contractor or self-employed person
Tips and gratuities: bonus income received from satisfied customers for exceptional service and performance
Royalties: payments for artistic works
Termination payments: income from employer received due to temporary or permanent dismissal, including stand-down payments, employment termination payments and redundancy payments
Annual leave payments: lump-sum payments for annual and long-service leave owing when an employee leaves a company
Parental leave payments: income received from government or employer for leave due to recent birth or adoption
Government payments: income received from the government including the age pension, disability support pension, carer payments, Austudy, youth allowance and JobKeeper payments during periods of unemployment
Superannuation pensions: income from a superannuation income stream
Annuities: payments from a life insurance company or friendly society
Policy payments: income received from sick or accident insurance, income protection and workers' compensation policies
Armed forces payments: income and allowances for continuous full-time Australian Naval, Army or Air Force Reserve service
Foreign employment income: income Australian Government agency employees earn delivering official development assistance overseas
Employer allowances: extra payments to employees reported separately on an income statement that pays for expenses such as laundry, petrol, approved self-education and hazardous working conditions
Consultation fees: payments received from clients for services
Jury attendance fees: payments to jurors who forgo income to serve on a jury
Payments in arrears: lump-sum payments or backpay received for duties performed in an earlier year
Interest: payments from bank accounts and term deposits
Dividends: payments from holdings shares in companies or trusts
Rental income: rent from tenants living in investment properties and other rent-related payments, such as bonds from a defaulted tenant and insurance payments for lost rent
Income from managed investment trusts: income from cash management, money market, mortgage and unit trusts and managed funds
Capital gains: profits from the sale of capital assets, such as investment properties
How to calculate annual income
Calculating your annual income involves adding up all your income over a 12-month period. You may perform your calculations using spreadsheets or pen and paper. Online calculators can also help you add up your annual income. You may also simply calculate your annual income when you're lodging your tax return. This is a good approach, as the Australian Tax Office's lodgement tool prompts you for different categories of income to help you remember all the money you earned. If you want to calculate your annual income offline, here is a good strategy:
1. List all your income sources
Using the bullet points above as a guide, list all the types of income you receive and their sources. If you have more than one source of income under a single income type, list it separately. For example, if you received employment income from working in a supermarket and driving a ride-share vehicle, you may write these two jobs down separately. Note the amount of income beside each income source.
2. Calculate your yearly income
You may add together any income you have a full year of history for. For example, if you made $500 from jury attendance fees and $50,000 from capital gains after selling an investment property, you may add these figures together. At this step, your yearly income is $50,500.
3. Calculate your monthly income
You can then calculate your monthly income. For example, if you make $6,000 a month from contract work and $2,000 a month in rental income, your monthly income equals $8,000. Multiplying your $8,000 monthly income by 12 provides an estimated yearly income of $96,000. To find your estimated annual income, simply multiply your monthly income by 12, the number of months in the year. Note that this is only an estimate of your yearly income from monthly income, as your circumstances may change. For example, you may decide to increase your tenant's rent or get a new client.
4. Calculate your hourly wage income
If you have a new job that began less than a month ago that pays you an hourly wage, you can use this figure to calculate your hourly wage income. Take note of the payment amount on your most recent payslip and how many hours you worked that week. For example, imagine your payslip from a new courier job shows $907.50 for working 33 hours in the week, including some bonus payments. Dividing $907.50 by 33 gives an hourly wage income of $27.50.
5. Calculate your hourly income
The hourly income calculation method above can help you calculate employment income. Multiply the hourly wage by typical work hours for your weekly wage. Permanent employees multiply this wage by 52, the number of weeks in the year. Casual employees may multiply the weekly wage by a smaller number if they're taking unpaid leave. Using the example above, you may multiply the hourly wage of $27.50 by 25, the number of hours promised by an employer, for a weekly wage of $687.50. If you want a two-week unpaid holiday, you multiply the weekly wage by 50 to get $34,375.
6. Add up your total annual income
Adding up your yearly and estimated monthly and hourly income calculations gives you a total annual income, otherwise known as the gross income. Using the examples above, you add $50,500 (the yearly income), $96,000 (estimated income from monthly income) and $34,375 (estimated income from hourly income). This gives a total gross annual income of $180,875.
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