Annual Income
What is annual income?
Annual income is the amount of money an employee or business makes during a fiscal year (a 12-month period).
For your employee, gross annual income is the number before any tax deductions or retirement contributions. Annual net income is their income after taxes and deductions—also known as take-home pay.
Since income and salaries are annualized primarily for estimating taxes, it’s important to know how to do it correctly. If you have questions or concerns about estimating your income for tax purposes, you should always consult a tax professional.
How to calculate annual income
Annual income calculations don’t need to be overly complicated. You can work it out by multiplying your gross pay by the number of pay periods in the year.
Here’s an example:
An employee is paid semi-monthly and earns $1,500 per pay period. The employee will multiply their gross pay for one pay period by the total number of pay periods in a year—typically 24 for semi-monthly pay schedules.
So, the employee will use the following calculation: $1,500 x 24 = $36,000
Typical working hours per year
Typical annual working hours will depend on your employee’s workweek. But let’s say they work 40 hours per week, and there are 52 weeks per year, so the total typical working hours per year is 2,080. However, that number doesn’t consider PTO policies and holiday pay, which vary by employee and organization.
Is annual income the same as annual salary?
In short: No. An annual salary is the amount an employer pays salaried employees in exchange for the job they do during the year. Annual salary is a single source of income, and a very specific one. It does not include income from other sources, or hourly wages. Hourly workers may want to calculate their wage to salary.
What counts as annual income?
Your employee’s gross annual income is the sum of everything they earn in a year—from your organization or a combination of sources. Total annual income is calculated before tax or retirement contributions, and determines an individual’s taxable wage base and income tax rate.
Banks also use this figure to determine whether to approve people for loans. If your employee has multiple jobs, they’ll need to tally up their annual income for each and add them together for their total annual income.
Is annual income paid yearly?
Not usually. Although annual income refers to an employee’s yearly pay, it’s typically divided into 12 paychecks throughout the year—one each month—or via a bi-weekly paycheck calendar.
What is annualized salary?
Annualized income is an estimate of how much an employee will earn over a year, including all remuneration—from basic pay to non-monetary benefits. It’s the projected amount the employee will earn.
Annualized salary for hourly employees
This is calculated by multiplying the employee’s hourly wage by the number of hours they typically work in a year, providing an estimate of what they would earn if they worked full-time throughout the year.
Annualized salary for salaried employees
Annualized income is usually less relevant since their salary is already set for the year, but it may be used to calculate or adjust their compensation for a partial year or a specific contract period.
For instance, if someone earns $25,000 in six months, their annualized income would be projected as $50,000. If an employee’s salary is annualized, it means they take home a fixed and equal amount of a predetermined annual salary each paycheck. This method ensures a regularly distributed paycheck and helps simplify payments of taxes, insurance premiums, and employment benefits.
Annual income vs. annualized income
In short: annual income is what an employee has earned over the course of one calendar year (12 months) and reports on their taxes; annualized income is an estimate of what that income will be, and can be used to make estimated tax payments.
Annual income is an employee’s total yearly income and is typically used for salaried employees with more predictable annual earnings. Annualized income is an estimate of how much an employee will earn over the course of the year.
Salaried employees receive their pay—including wages, salaries, bonuses, and other forms of compensation—regardless of how many hours they’ve worked. This means they usually don’t receive overtime and don’t always have to clock in and out—depending on their role. For example, if you earn $50,000 per year, that’s your annual income.
Annual salary vs. annual compensation
Although it sounds like they describe similar things, annual salary and compensation aren't the same. The salary is how much your employee is paid for doing their job, the compensation it includes, plus all the other financial incentives, too.
Here are a few reasons why the difference between annual salary and annual compensation matters:
- Tax Purposes: Almost always, an employee’s annualized compensation is considered by the Internal Revenue Service (IRS) to be taxable income, which determines how much is to be paid in taxes
- Employer/Employee-Matched Contributions: Certain retirement plans’ contribution limits are based on compensation, not salary
- Employee Valuation: It can help an employer to know if the employee is being fairly compensated in pay and benefits in return for skills, capabilities, and experience
- Budgeting: An annualized salary is often used to budget for full-time employees who won’t be working a full year (for example, school employees who don’t work over the summer or employees who retire before the end of the year), part-time employees, and hourly workers
Say a schoolteacher works a 10-month position during the year but gets paid bi-weekly, even over the summer. This annualized salary payment method ensures that the teacher receives a regular paycheck throughout the year and makes it easier to equally spread out the cost of taxes, insurance, and other employment benefits.