An HR Glossary for HR Terms
Glossary of Human Resources Management and Employee Benefit Terms
Annual Income
What Is Annual Income?
Annual income is the amount of money an employee makes in a year before deductions.
Is Annual Income Monthly or Yearly?
Annual income is paid over 12 months but typically divided into paychecks throughout the year.
How to Calculate Annual Income
Here’s how to calculate annual income:
- Divide the gross pay (before deductions) by the number of months worked to determine the monthly income.
- Multiply the monthly income by 12 (the number of months in a year) to get the annual income.
For example: Let’s say an employee worked from January 1 to May 31, which is 5 months, and earned $30,000 in gross income during that time. Divide $30,000 by 5 months to get a monthly income of $6,000, then multiply that by 12 months to get an annual income of $72,000.
Another option is to multiply gross pay for one pay period by the total number of pay periods in a year, which is typically 26 for companies that pay their employees biweekly.
Since income is annualized primarily for estimating taxes and investments, it’s important to know how to do it correctly. If you are unsure of your calculations or want a shortcut, use an annualizing calculator.
How Many Weeks Per Year Are There?
There are 52 weeks per year.
How Many Whole Weeks Are in a Year?
On average, each year amounts to 52 weeks and 1 day, or 52 whole weeks total.
Typical Working Hours Per Year
If a typical full-time employee works 40 hours a week and there are 52 weeks per year, the total typical working hours per year is 2,080. However, that number doesn’t take into account PTO and vacation, which vary by employee and organization.
What Does Compensation Mean?
Annual income is part of an employee’s total compensation package. Compensation is the monetary payment employees earn for doing their jobs. Compensation is a major factor in where employees choose to work, with our research finding that 75% of employees would consider leaving their current job for a salary increase.
Total compensation combines an employee’s annual income with any financial benefits provided during the working period, such as:
- Commissions and bonuses
- Health and dental insurance
- Disability and life insurance
- Sick leave and paid time off
- Retirement plans
- Tuition and child care assistance
Annual Income vs. Annualized Income
Annual income is an employee’s total yearly income and is typically used for salaried employees with more predictable annual earnings. Salaried employees receive their pay regardless of how many hours they’ve worked, meaning they usually don’t receive overtime and don’t have to clock in.
Annualized income is an estimated annual salary based on the actual time spent on the job and the wage type. If an employee’s salary is annualized, it means that an employee takes home a fixed and equal amount of a predetermined annual salary each paycheck. This method ensures a regularly distributed paycheck and helps to facilitate the paying of taxes, insurance premiums, and employment benefits.
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 IRS to be taxable income, which determines how much taxes are to be paid.
- Employer/Employee-Matched Contributions: Certain retirement plans’ contribution limits are based on compensation, not salary.
- Employee Valuation: It can help an employer 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 (e.g., 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.
For example, a school teacher works a 10-month position during the year but gets paid biweekly, 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 resulting in payroll deductions or distributions.
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