Whenever you’re at a career crossroads and need to make decisions, it’s essential you have a firm understanding and grasp of your finances. You need this knowledge of your finances so you can calculate your net income (NI), which is critical in understanding the financial situation you’re in.

Although net income directly relates to your salary, there are other factors to consider to help you get a clearer picture of how much you *actually* earn. By having this figure on hand, you can better plan for your budget by knowing your regular expenses. This is because you can start financially planning around your annual net income, rather than just relying on the salary sum alone.

But what is it? And how do you calculate your annual net income? Here’s what you need to know ahead of the next time you need to calculate this total.

## What Is Annual Net Income?

Annual net income is how much money you take home after a year, once you consider expenses such as taxes. After reducing some of your costs from your gross revenue, you can calculate your yearly net income — something stated at the bottom of your pay stub, paycheck or **job offer letter**.

This figure is crucial, especially when you’re applying for a new credit card, you want to purchase a new car, take out a loan or work out your financial budgets. Once you’ve deducted all of these expenses, the money left is over is your net income and the total you’ll need to cover things like your regular bills and other living essentials.

By having your annual net income figure at hand, you’ll better understand how much you can actually spend and afford so you don’t live beyond your means. Your annual net income will be higher than your gross income, as the latter is what you earn before the other expenditures are removed from the total.

The gross income figure is what you, as an employee, agreed with your current employer, which is your annual salary. Once the relevant deductions have been made from the gross income, the sum you receive is your annual net income.

This is why annual net income is a more accurate representation of your finances, as your take-home pay isn’t your gross pay but rather the money you receive once your mandatory expenses have been reduced.

## How to Calculate Annual Net Income (With Examples)

Here’s what to include to calculate your gross annual income and your net annual income.

### Income That Counts Towards Your Total Revenue

- Base salary and compensation.
- Interest from checking accounts or savings.
- Positive returns on investments.
- Contractor or freelance work.
- Royalties.
- Share income by a spouse.
- Income from part-time jobs.
- Gambling earnings.

### Income Deductions

- Medicare payments.
- Retirement contributions.
- Local, state and federal taxes.
- Social security.
- Pre-tax healthcare premium payments.

### Calculating Your Annual Net Income From Pay

**Determine Your Income:**This is your gross pay, so it’s more than your actual earnings or what you have in your account.

**Find Your Annual Income:**This is where you’ll need your pay schedule. Whether it’s weekly, bi-weekly, semi-monthly or monthly, work out how much you make a year so you can calculate the yearly income. Suppose you’re paid weekly, then you multiply the salary by 52. If it’s monthly, multiply it by 12. If it’s hourly, you’ll need to know your hourly rate and multiply it by the correct figure depending on how many hours you work per week throughout the year.

**Find Your Expenses:**Taxes, social security, Medicare, retirement contributions — what else are the regular expenses that you’ll need to deduct?

**Add Extra Income:**If you have another source of income, get this figure, too. It could be a part-time job, benefits or anything in between. Calculate these rates separately for more accurate figures.**Calculate:**Subtract your costs from your gross revenue and then add any excess income — that’s your annual net income.

The formula you need to keep in mind for this is: **Annual net income = Gross income – Expenses + Additional income. **Let’s look at a few examples of what this would look like with actual figures.

**Tip: **For a business, this formula would look like this: Business annual net income = Gross revenue – Expenses

### Annual Net Income Examples

Molly’s annual salary is $55,000, which is paid on a bi-weekly basis. That means the gross income on each paycheck is $2,115. When taxes, social security, Medicare, healthcare premiums and 401k contributions come into play, Molly pays a total of $500 per paycheck. That means her take-home net pay is:

$2,115 – $725 = $1,615

Molly then needs to multiple this by 26 — this is the number of times she’s paid each year on a bi-weekly cycle.

$1,390 x 26 = $41,990

This figure is Molly’s annual net income.

Now, let’s extend this into another example. Molly is also a freelance developer in her spare time, earning $8,000 a year doing this. She needs to pay $15.3% self-employment tax, leaving her with $6,776 from the freelance job.

$41,990 + $6,776 = $48,766 — this is Molly’s annual net income.

## Final Thoughts

You can include other incomes besides your gross income, as we’ve mentioned above. Whether it’s stock market investments, trust fund payments, military investments and more, feel free to add this to your net income so you have an accurate, comprehensive figure.

Calculating your annual net income isn’t a challenge when you know what figures you need to report. By following our tips above, you’ll have a much better understanding of your financial health and whether a new job or salary is worth accepting, depending on how much you’ll really take home.

For more tips, tricks and advice to help you excel in your career, make sure to head over to our blog.