Annual income is the total value of income earned during a financial year. The term is also used in the context of income inequality statistics, which measure the distribution of income across a population.
Gross annual income is calculated by adding together all income earned during a year. This includes wages, salaries, bonuses, interest, dividends, capital gains, alimony, child support, and other sources. It is important to note that gross annual income does not include any savings or retirement contributions.
Net annual income is calculated by subtracting all expenses from gross annual income. This includes taxes, retirement contributions, childcare costs, food, clothing, shelter, transportation, and any other expenses.
Why annual income is important?
Annual income is important because it is used to calculate the following:
- The amount of income tax to be paid
- The amount of social security to be paid
- The amount of Medicare to be paid
- The amount of unemployment insurance to be paid
- The amount of workers' compensation to be paid
- The amount of other taxes (property, sales, etc.)
Annual income is also important to measure the distribution of income across a population. This is done using income inequality statistics, such as the Gini coefficient.
Annual Income vs. Salary
The term annual income is often used interchangeably with salary. However, there is a distinction between the two terms. Salary refers to a fixed amount of income that is paid on a regular basis. Annual income refers to the total value of all income earned during a year.
For example, if you earn $50,000 a year, you could be paid $5,000 every month. In this case, your annual income is $50,000. However, if you are paid $1,000 every week, then your annual income is $52,000 ($1,000 per week x 52 weeks).