A person’s annual income is essential information, but not everyone knows how to calculate this magic number or even what to do with it. Knowing your yearly salary is vital for significant purchases, like a house or car.
Creating a budget or meeting your personal or family financial goals is also essential. This figure, simply the amount of money an employee earns annually, can be determined quickly.
Key Terms
There are some key terms to learn before computing one’s annual income. First and foremost, we need to define the meaning of yearly income itself. The other essential definitions to consider are net income, gross income, withholdings (often simply referred to as taxes), deductions, and garnishments.
Once a person understands these terms – and the differences between them – they are ready to begin calculating these numbers for themselves:
- Annual income: refers to the amount of money or income an employee is paid annually (or yearly). Companies often use this figure to discuss the pay rate of a position when searching for new employees; typically, “annual income” refers explicitly to “gross income.”
- Gross income: despite the connotation within its name, it is not a bad thing at all. Gross income is the amount of money or wages an employee will earn before taxes, deductions, and other withholdings are considered. Gross income is simply your income before taxes.
- Net income: commonly referred to as “take-home pay” because it is the money the employee receives after taxes, deductions, withholdings, etc., are taken out.
- Withholdings: According to irs.gov, withholdings are the federal income taxes withheld from your paycheck. The site says, “The amount of income tax your employer withholds from your regular pay depends on two things: The amount you earn. The information you give your employer on Form W–4.” In some states and municipalities, there can also be state and local taxes withheld from your earnings.
- FICA: Besides federal, state, and local taxes, employees may notice the term “FICA” on their pay stubs. FICA is each employee’s contribution to Medicare and Social Security. The employer and employee pay the taxes, although the employee will likely only notice their contribution to these entities.
- Medicare: paid by all employees, with those earning more money incurring a higher rate, which must be paid.
- Social security: deducted for all employees up until a certain taxable income is reached. In 2023, that number is just over $160,000, which means any employee who earns above that amount in a year is no longer required to pay that deduction for the remainder of that tax year.
- Deduction: a term that can also encompass federal, state, or local taxes. However, it can include retirement and health plan benefits at the employee’s direction.
- Garnishments: court-ordered withholdings. Often, wage garnishments are associated with child or spousal support but can also include any type of court-ordered debt repayment.
How To Calculate Weekly Income
Calculating weekly income is pretty straightforward. It involves determining the total earnings for a specific week, which may include various sources of income such as wages, salary, bonuses, commissions, and other forms of compensation.
Here’s a step-by-step guide to calculating your weekly income:
- Identify your sources of income: Start by listing all the sources of income you receive during the week. This may include your primary job, part-time work, freelance gigs, rental income, investment dividends, or any other income streams.
- Calculate your gross income: For each income source, calculate the gross income for the week. This is the total amount you earn before any deductions or taxes. If you have a regular salary, this step is straightforward. If your income varies, such as with hourly or freelance work, you’ll need to tally up your hours or completed projects and multiply by your hourly rate or the agreed-upon amount for each task.
- Deduct taxes and other withholdings: Subtract any mandatory taxes, Social Security, Medicare, and other withholdings from your gross income. Your employer typically makes these deductions if you have a regular job. You must estimate and set aside funds for these taxes if you’re self-employed. Be sure to consider federal, state, and local taxes and any other applicable deductions.
- Account for other deductions: Besides taxes, consider any other deductions you may have, such as retirement contributions, health insurance premiums, or other automatic payroll deductions.
- Sum up your net income: The result after all deductions represents your net income. This is the amount you’ll receive in your bank account or as a paycheck.
- Calculate other sources of income: If you have multiple sources of income, repeat these steps for each source and add the net income from each to find your total weekly income.
Here’s a simplified formula to summarize the process:
Weekly Income = Gross Income – Taxes and Withholdings – Other Deductions
Remember, your financial situation may be more complex, especially if you have irregular income or various deductions. In such cases, it’s a good idea to maintain detailed records.
How To Calculate Monthly Income
Calculating monthly income is an extension of calculating weekly income. To determine your monthly income, you’ll follow a similar process, but you’ll accumulate your earnings over an entire month.
Here’s how to do it:
- Calculate Weekly Income: Follow the steps outlined in the previous section to calculate your weekly income for all sources.
- Multiply by the Number of Weeks: If your income sources are consistent, you can multiply your weekly income by the number of weeks in a month to estimate your monthly income. Typically, there are either four or 4.33 weeks in a month, depending on whether you use a 4-week or a monthly average (4.33 weeks accounting for months with varying numbers of days). So, if you earn a consistent weekly income, you can use one of these formulas:
- For a 4-week month: Monthly income = Weekly Income x 4
- For a 4.33-week month: Monthly Income = Weekly Income x 4.33
- Account for Irregular Income: If your income varies from week to week, such as when you have hourly or freelance work, tracking your weekly earnings is essential. Sum up your weekly income for each week within the month to find your total monthly income.
- Include All Sources: Don’t forget to account for all sources of income. If you have multiple income streams, add them together to get your total monthly income.
- Deduct Taxes and Other Withholdings: Like with weekly income, subtract any taxes, Social Security, Medicare, and other withholdings from your gross monthly income. Consider all relevant federal, state, and local taxes.
- Account for Other Deductions: Include any other deductions you may have, such as retirement contributions, health insurance premiums, or other automatic payroll deductions.
- Sum Up Your Net Income: The result after all deductions represents your net monthly income. You’ll receive this amount in your bank account or as a paycheck for the entire month.
Remember some expenses, such as rent or mortgage payments, may be due monthly.
So, when budgeting, it’s helpful to know your monthly income to ensure you can meet all your financial obligations.
If your income fluctuates significantly, consider creating a budget based on your lowest expected monthly income to ensure you can cover your essential expenses.
How To Calculate Annual Income
Calculating your annual income is the process of determining your total earnings for an entire year. To calculate your yearly income, you’ll follow a process similar to that for weekly and monthly income, but you’ll accumulate your earnings over a 12-month period.
Here’s how to calculate your annual income:
- Calculate Monthly Income: Follow the steps outlined in the previous section to calculate your monthly income for all sources.
- Multiply by 12: To find your annual income, simply multiply your total monthly income by 12. This accounts for the 12 months in a year. The formula is as follows:
- Annual Income = Monthly Income x 12
- Include All Sources: Ensure you account for all sources of income, including your primary job, part-time work, freelance gigs, rental income, investment dividends, and any other income streams.
- Deduct Taxes and Other Withholdings: Subtract any mandatory taxes, Social Security, Medicare, and other withholdings from your gross annual income. Be sure to consider federal, state, and local taxes and any other applicable deductions.
- Account for Other Deductions: Include any other deductions you may have, such as retirement contributions, health insurance premiums, or other automatic payroll deductions.
- Sum Up Your Net Income: The result after all deductions represents your net annual income. You’ll receive this amount throughout the year after taxes and other deductions.
Salaried Employee Differences
Jobs that pay by yearly salary are different from jobs that earn an hourly wage. Instead of clocking hours, your job is dependent on completing projects. Some weeks you will work more hours, and some less. But the expectation is typically that you spend 40 hours per week working, and your annual salary is divided equally into pay periods throughout the year.
If you are a salaried employee, your yearly salary is the same as your annual income. Whatever your job has contracted to pay you as your yearly compensation can be divided by 12 if you want to determine your monthly salary.
Calculating Multiple Income Streams
Remember to include all income sources in your calculations. If you have multiple jobs, you can still use this same calculation. You will just need to perform the calculation for each source and then combine the totals to find your annual income. This includes self-employment income, rental income, unearned income, alimony payments, foreign income, etc.
Calculating Net Income
It is often helpful to determine not only a person’s yearly income but also their net income. Net income is specifically beneficial in budgeting, creating a savings plan, and more, as this dollar amount is the amount you have to work with after receiving your paycheck each pay period.
You will need several pieces of data to figure out your net income. First, you’ll need to know your gross income. (Remember, this is your hourly rate multiplied by the number of hours you work per week, multiplied by 52 weeks.) Additionally, you must know what withholdings, deductions, garnishments, and tax rates apply to you.
The first step is subtracting pre-tax contributions, such as specific retirement contributions, from your gross income. This gives you your taxable income. Next, you will remove all applicable taxes (federal, state, local, and FICA) from the taxable income.
Finally, you will subtract any deductions for benefits or retirement that are considered post-tax contributions and any wage garnishments. The final number after these calculations is your net income.
Importance of Annual Income Information
Don’t be fooled. While figuring taxes can get complicated, such a simple mathematical formula to determine annual income greatly impacts a person’s life. A person’s yearly income influences their borrowing power if they need financing for a large purchase, such as a new car or a house.
It also impacts eligibility for credit cards, personal loans, and even financial aid for your children’s college. While it may take a few minutes to calculate, the effects are far-reaching and long-lasting.
And though calculating net income is slightly more involved than calculating gross income, understanding an individual’s net income can mean the difference between a successful monthly budget and a failing one.
As with most things, the more information one has about their finances, the better equipped they are to meet their personal financial goals.
This article originally appeared on Wealth of Geeks.