Gross annual income is the total value of money received by an individual or a business during a fiscal year.
It includes fixed or variable income sources and these can be active or passive income sources.
Let us discuss what is gross annual income and how to calculate it using a simple step-by-step guide.
What is Gross Annual Income?
Gross annual income refers to the total annual income earned by an individual or a business before any deductions.
For individuals, it is the gross pay or wages earned during a fiscal year. For businesses, it is the amount received through sales revenue during a year.
Gross income includes all types of income sources an individual or business generates. These sources can be permanent or temporary. It will also include any one-time gains or income made during a year.
Similarly, for businesses, it includes all types of income generated through the sale of products and services as well as investment and interest income streams.
Annual gross income for individuals includes the following sources:
- Salary/wages plus overtime allowances.
- Commissions, performance bonuses, and tips.
- Social security and retirement benefits.
- Alimony or childcare support.
- Interest earned, dividends, capital gains.
- Rental income and sale proceeds during the year.
- Annual gross income for businesses includes:
- Product and service sale proceeds.
- Interest income, dividends, and capital gains.
- Tax refunds.
- Rental income and passive income sources.
- Income received through royalties, patents, and trademarks.
In short, we can include any type of income that adds monetary value to an individual or business’s annual income.
Gross Annual Income Conversions
Individuals may receive income as salary or wages. Salary payment is a fixed annual remuneration regardless of the working hours.
Wage rates are usually described in hours. Therefore, we can convert hourly income into weekly, monthly, and yearly.
If you work 40 hours per week, 200 days, 50 weeks, and 12 months in a year, your annual gross income conversion rates will be:
Hourly: Multiplied by 2,000
Daily: Multiplied by 200
Weekly: Multiplied by 50
Monthly: Multiplied by 12
Conversely, if you have a fixed annual income, you can divide that by these numbers to get the respective hourly, daily, weekly, and monthly rates as well.
Conversion from Net Income
Suppose you receive a fixed salary net of taxes in your bank account. You can convert this net income into gross income using the following formula:
Gross Income = Net Income/ (1- Tax Rate)
If your tax rate is 20% and you received a net income of $45,000 then,
Gross Income = $45,000/ (1-20%) = $56,250.
How to Calculate Gross Annual Income?
You can follow these simple steps to calculate gross annual income as an individual.
Determine Your Income Sources
The first step is to consider your income sources for the year. Your salary or wages are the base income resources.
If you are a salaried person, you’ll receive a fixed annual income regardless of the working hours. If you receive an hourly wage rate, your annual income will differ by the number of hours worked in a year.
Calculate Your Pay Rate
Salaried individuals can calculate their gross income using the formula listed above. Usually, they will receive net income after tax deductions.
You can then multiply this monthly income by 12 to get your annual income. Similarly, hourly and weekly rates can be used to convert the income to annual income.
Add Other Annual Income
The next important step is to add other sources of income than salary or wages. These sources include bonuses, commissions, and tips from your workplace.
Similarly, add other passive income or side hustles including freelancing income, part-time income, rentals, interest earned, dividends, and so on.
If you sold stocks or properties during the year, include your capital gains too.
Calculate Gross Annual Income
Finally, you can add the components from regular salary income to side hustles and rentals to calculate your gross annual income.
Annual Net Income
If you deduct annual expenses from your gross income, it will give you annual net income.
Deduct annual income tax, retirement plan contributions, childcare support, and other minimum annual expenses. The resulting figure will be your net annual income.
Annual Gross Income for a Business
You can calculate the annual gross income for a business using the following steps.
The first step is to record the sale proceeds for the year. You can calculate it by using product prices multiplied by the number of units sold in a day, month, or year.
Similarly, if your main source of revenue comes through services, calculate it by multiplying the completed projects at the service rates.
Cost of Goods Sold
The second step is to calculate the direct costs of production or cost of goods sold (COGS). These are direct and indirect overhead expenses incurred by a business.
Gross Annual Income
Finally, deduct your COGS from your annual revenue to get the gross annual income.
Let us consider a working example for an individual and business.
Annual Gross Income – Individual
Suppose Mr. John Right receives $27 per hour for his electrical work in a company. He works 40 hours per week and 50 weeks a year.
Mr. John Right received an annual bonus of $7,000. His other income includes dividends of $700, interest on savings of $300, and sale proceeds from an old car of $15,000 for the year.
The gross income for Mr. John Right will be calculated as:
Annual Wages = $27 × (40 × 50) = $54,000
Gross Income = $54,000 + $7,000 + $700 + $300 +$15,000
Gross Income = $77,000
Annual Gross Income – Business
Google’s parent company Alphabet Inc. Posted an annual revenue of $ 257,637 million for the year ended 2021.
It showed a COGS amount of $ 110,939 million for the year. Therefore, its gross annual income remained at $ 146,698 million for the year ended 2021.
Annual Gross Income Vs Adjusted Gross Income
The adjusted gross income (AGI) is different from the annual gross income.
The AGI is your total annual gross income minus deductions and expenses. The purpose of calculating AGI is to determine your tax liability.
Your gross income will include all the income sources for you as mentioned above. The deductions and expenses here will include retirement contributions, loan interest payments, alimony payments, self-employment tax payments, and other qualified deductions.
The net amount will determine your tax liability for the year. Therefore, your AGI will always be less than or equal to your gross annual income but not greater than that.
Annual Gross Income Vs Annual Net Income
Annual gross income is the total income generated by an individual or business before deducting certain expenses.
A business will deduct only the cost of goods sold from the annual revenue to calculate the gross income. Deducting other admin and non-operating expenses will give the net income of the business.
Similarly, deducting annual expenses from an individual’s annual gross income will give you the net annual income.
Annual Income Vs Revenue Vs Earnings
Revenue or sales amount is the direct value received from selling products or services by a business. An individual’s revenue will come from investments, rentals, and passive income sources.
When you include all types of value-generating sources, it provides you with the gross annual income for an individual or business.
Earnings refer to the net income or take-home value after deducting all types of expenses and deductions.
Earnings are net of all expenses including taxes. It is also called the net profit of a business for a fiscal year.
Importance on Annual Gross Income
The annual gross income figure is important for individuals and businesses in similar ways.
- It helps individuals to assess the income resources and find a starting point to determine the net income for the year.
- It helps them to apply for mortgages, loans, and other financing facilities.
- It is used in calculating the AGI and hence the tax liability for the year.
- It can be used in financial analysis for the year to forecast and plan for the coming years.
- Lenders and landlords typically require annual gross income to assess the financial strength of an applicant.
- Businesses also need to determine their tax liabilities by using this figure.
- Businesses use gross income in different types of financial analysis including gross profit margins, gross sales, debt to revenue, and other financial metrics.