What is Annual Net Income & How to Calculate It?

What is Annual Net Income & How to Calculate It?
Point Editorial

Annual net income is the amount of money you collect after a single year after tax deductions and other necessary fees. 

Credit and loan applications require you to provide your annual net income to better understand your financial situation. This indicates your financial standing alongside your credit score

Read on to learn more about what annual net income is, how to calculate personal net income and for businesses and tax returns, and why it's necessary for credit card applications. 

What is annual net income?

Annual net income, or your “personal yearly income,” is how much money remains after deductions, or your take-home pay. This applies to both individuals and businesses. Most people use the remaining amount to make monthly payments like rent, credit card bills, and purchase groceries. 

The bottom of your regular pay stub may include your annual net income, but that isn’t always the case. It may list your annual gross income instead. 

Your gross income will be larger than your annual net income because this accounts for all you earn before any deductions. Deductions automatically removed from your salary can include Social Security payments, Medicare or other health insurance payments, retirement costs, and local, state, and federal income taxes. 

Like net worth calculations, which are found by subtracting your total assets from your total liabilities, your net income isn’t simply the total amount you get paid.

Knowing the difference between the two is important, especially if you’re looking to save, budget better, or apply for certain credit card types.

How to calculate it

Multiple variables determine your annual net income, including any sources of income. Money earned from retirement contribution funds, grants and scholarship money, Social Security payments, stock market investments, gambling earnings, and the interest you collect from your checking accounts are just some of the forms of payment that constitute your total net income. These are added to your income after deductions. 

The following are the four basic steps to follow to compute your annual net income:

Step 1: Determine your annual salary. 

If your employer pays you by the hour, multiply your hourly wage by the number of hours your work each week. Then multiply it by 52 for the total number of weeks in a year. 

Step 2: Add your additional income to your gross annual salary. 

Add any extra payments you receive, like part-time job wages, payments from a trust fund, or royalties to the gross annual salary you determined in step one. 

Step 3: Subtract the sum of all the deductions taken from your paycheck from your final gross income. 

Don't be afraid to reach out to your employer or the HR department if you're unsure what these are. 

Step 4: Subtract your daily expenses from your final gross income. The product is your annual net income. 

This calculation also applies to a company’s annual net income. By subtracting a business’ overall total revenue from the sum of all the listed operating expenses, one can find their annual net income. Business deductions include employee salaries, utility payments, depreciation, interest and mortgage payments, and stock and inventory. 

If the number is positive in value, the business is indeed making a profit. This number is important to investors since it indicates the business’ performance. 

Annual net income for unemployment

When you file for unemployment, you must report your pre-tax gross earnings. This value helps determine any benefits, tax returns, or exemptions you’re eligible for. 

But you should note that even though you’re not working, the government still expects you to pay your taxes. Unemployment checks are taxable, just like ordinary income. 

Otherwise, calculating your annual net income follows the same procedure. 

Annual net income on tax returns

Form 1040 is the form that individual Americans must fill out and send to the Internal Revenue Service (IRS). This paper reports your annual income. Individuals must subtract and make a note of relevant deductions to determine their total taxable income. Local taxes vary depending on where you live. 

Again, you may find this number somewhere on your paycheck, so you can avoid doing this math yourself. But it can’t hurt to double-check, and there are several online calculators if you need help. 

Annual net income on credit card applications

Your annual net income is a crucial piece of information to include on any credit card application.

Why? It’s a standardized part of the evaluation process, and it shows how much money you use to live. Credit card companies want to know this value to determine an acceptable credit limit, the types of cards you qualify for (LINK), what your interest rates will be, and whether or not you make enough for your monthly payments. 

Adding your spouse’s monthly income is also recommended, since this helps increase your creditworthiness in the eyes of banks and other lenders while boosting the accuracy of your personal and financial situation.  

You should never lie about your income in a credit card application. The company can verify what you include, and including false data on an application is illegal.

The bottom line

Your annual net income is just one of many facets that help paint a complete picture of your financial health. Other aspects include your credit score, expenses, and your payment history. This information advises creditors and lenders, but knowing where you stand can help you make financial decisions. 

Earning and saving money is a tricky business these days. 

Let us introduce PointCard.   

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Alongside the extensive rewards program that helps you build your wealth, Point comes with multiple safety measures to help protect that wealth. Car rental and phone insurance, travel cancellation insurance, fraud protection with zero liability, and no interest rates are just some of these features. 

You work hard for your money, and Point works just as hard for you in return.

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