Annual Net Income: What It Is And How To Calculate It

By Chris Kolmar - Dec. 4, 2020

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Before you make any career decisions, it’s important to have an understanding of your finances. One key element of knowing your finances is being able to calculate your net income, or NI. Determining your net income is crucial to understanding your financial situation.

While net income is similar to your income or salary, net income takes other factors into account, so you have a clearer idea of your actual earnings. This number becomes a better figure for you to plan your budget around since it takes your regular expenses into account. Centering your budget and other financial planning around this number is better than just relying on your salary figure.

Knowing your annual net income also helps you in financial situations. Sometimes accountants, banks, credit card companies, and other institutions will ask about your net income to understand your financial stability.

Calculating your net income isn’t hard, but it can be complicated to figure out what numbers you need. In this guide, we’ll break down all of the elements that go into calculating your net income so you’ll be able to have a better understanding of your financial health.

What Is Annual Net Income?

Annual net income is the money you take home over a year, after taking expenses like taxes into account, so you’re dealing with the actual money you have instead of your salary. When people talk about net income, it’s usually in yearly terms, so you know how much money you make in a year.

Net income is a more accurate representation of your finances since it accounts for mandatory expenses. Unlike your income or salary, also known as gross income, net income includes calculations for spending. Gross income is just how much you earn pre-taxes, and it will always be a larger amount than your net income.

Knowing your annual net income helps you budget and understand how much money you actually have. It more accurately represents what’s at your disposal than the untouched gross income amount. It’s a good number to have on hand when you want to make big purchases or financial decisions, like applying for a credit card or a loan. Annual net income can even help you set a budget and make sure you’re spending your money wisely.

What Is Deducted From Your Gross Income?

Gross income deductions include things like healthcare payments, social security, retirement costs (like 401k), and taxes (including local, state, and federal taxes). You can work with your employer or your company’s HR department to understand exactly what is subtracted from your gross income.

Think of it this way: gross income is the number you and your employer decided on when you accepted your job. The gross income deductions are the costs taken from your paycheck whenever you’re paid to go toward certain services. You never get the full amount of your salary when you get paid, so you need to account for that in your financial planning.

Knowing what’s taken from your paycheck is necessary for calculating your net income, so don’t be afraid to talk to your employer if you’re not sure what’s being deducted from your salary.

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What to Include in Your Annual Net Income

There are other incomes that you can include in your annual net income besides your gross income. If you have any other sources of income besides your salary, you can add that to your annual net income.

Consider other income sources, like stock market investments, royalties from any published work, retirement payments, social security funds, part-time job income, freelance income, or trust fund payments. You can also consider other payments like income from a spouse, grants, scholarships, or military allowances to add to your net income.

You can see now why annual net income is more accurate than just using your salary figure to calculate your financial standing. It’s a comprehensive figure that takes more of your routine earnings and expenditures into account.

This is what makes annual net income a better figure for planning your finances than just considering your salary. You get a more accurate calculation of the money you actually have to work with than just the salary number, which differs from what you see in your bank account.

It’s a good idea to keep your net income figure on hand, so you know how much you’re earning and spending on a regular basis. It’s one part of having a good understanding of your finances and being financially responsible.

How to Calculate Annual Net Income

Now it’s time to put everything together and calculate your annual net income. Here it is in a few easy steps.

  1. Determine your income. This is the same number as your gross pay or the amount of money you and your employer agreed upon for your salary. Remember, this number is bigger than your actual income and the money that gets put in your bank

  2. Find your annual income. To calculate your annual net income, you need to know your pay schedule. Do you get paid weekly, bi-weekly, or monthly? That will change how you calculate your annual income since you need to know how much you get paid in a year.

    If you’re paid weekly, multiply your salary by 52 or if you’re paid monthly, multiply your salary by 12 to get your annual gross income. Do you only know your hourly pay rate? Take your hourly rate and multiply it by 2000 if you work 40 hour weeks throughout the year to get your annual income.

  3. Find your expenses. What recurring expenses do you have? Think about things like loan payments and rent, as well as the deductions that are taken from your paycheck. You should be able to find most of these numbers on your paystub.

    Otherwise, remember to check in with your employer or HR department if you’re unsure what expenses are being taken from your paycheck. You’ll need to know these numbers as accurately as possible to get a clear annual net income.

  4. Add any other income. Don’t forget about other income or sources of money, like social security payments or income from part-time jobs. These can all get added into the calculation of your annual net income.

  5. Do the math. At this point, you have all the numbers you need to calculate your annual net income. Start with your gross income and subtract your expenses, then add back any additional income.

Annual net income = Gross income – Expenses + Additional income

Determining Annual Net Income for a Business

Just as we all have personal incomes and expenditures, companies also have recurring payments that affect their financial health. Businesses can also calculate their annual net income and get a good idea of how their company is performing.

This is a useful number to have on hand since it can help you tell the story of your business in a succinct data point. You can pitch your business to investors or ask for other support with your annual net income as a key data point. It’s also useful for financial and legal documents, so it’s a good idea to know your company’s annual net income.

Calculating an annual net income for a company is very similar to finding your own net income. You need to start with the company’s total revenue, or gross revenue, and find any recurring expenses. When getting your total revenue, focus just on the money you brought in from sales and other transactions. Don’t take any costs into account in this step.

Next, figure out all of the planned expenses for the company that you have. Think about all the little expenditures that you have monthly and annually. Here’s a list of the most common expenses you should consider:

  • Salaries for employees

  • Overhead costs (rent, software licenses, shipping costs, utilities)

  • Operating expenses

  • Employer contributions to health insurance, social security, and other programs

  • Federal, state, and local taxes

  • Loans and interest

These are not the only things that factor into company expenses, so talk with your accountants and anyone who deals with company finances. The more accurate figures you can get, the better picture of your company’s financial standing you’ll be able to get with an annual net income.

Like a personal annual net income, you can calculate a company’s annual net income with some simple math. Take the company’s gross revenue and subtract all of the recurring expenses, and there you have your business annual net income.

Business annual net income = Gross revenue – Expenses

Since companies involve many more moving parts, expenses, and people accounting for financial numbers, net income can become exaggerated (both inflated and deflated). It’s essential to be aware that net income can be manipulated slightly to produce certain results and make a company look like it’s doing very well or not so great.

When dealing with a company’s net annual income, don’t be afraid to ask for specific numbers and evaluate their credibility. Most of the time, annual net income is a reliable figure, but it doesn’t hurt to take it with a grain of salt.

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Chris Kolmar


Chris Kolmar

Chris Kolmar is a co-founder of Zippia and the editor-in-chief of the Zippia career advice blog. He has hired over 50 people in his career, been hired five times, and wants to help you land your next job. His research has been featured on the New York Times, Thrillist, VOX, The Atlantic, and a host of local news. More recently, he's been quoted on USA Today, BusinessInsider, and CNBC.

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