Home » What Does Annual Pay Mean, And How to Calculate it?

What Does Annual Pay Mean, And How to Calculate it?

One of the primary reasons for finding a good job is so that you can afford the lifestyle you have dreamt for yourself and your family. While it is essential that you achieve a sense of fulfillment with the job you have, it is also essential that it pays you well.

Calculating your annual income is the key to helping you understand your finances. It can help you plan your budget, save for your old age, pay your taxes, pay medical bills and set aside a sum for your recreation.

Calculating your annual income can help you manage your finances in all aspects of your life. Whether you are a salaried individual, a self-employed freelancer, or a business person does not matter.

Once you have become adept at keeping track of your income and expenses, you will be able to make your financial decisions with a lot more confidence. It can also prevent you from making unnecessary expenses that might be detrimental to your financial history. Calculating your annual pay correctly can help you maintain a good credit score, preventing you from mismanaging your finances and getting into a debt trap.

Moreover, banks and other financial institutions will want proof of your income if you ever apply for a loan. And in case you want to buy a property or invest in your business to determine your repayment capacity. Here is all you need to know about it.

Bonus Read: How to Ask For a Raise? Our 4 Tips Which Can Help You.

What is Annual Pay?

What is Annual Pay

You might be wondering what does annual pay mean. Simply put, your annual pay is the income you earn in one financial year after deducting the taxes. In other words, it is the money you finally have in your hand after paying your taxes. This can be calculated in two ways:

Gross Annual Income

The gross annual income is the total payments you receive before deducting the taxes in a financial year.

Net Annual Income

The net annual income is the amount of pay you receive at hand after deducting the taxes.
In the case of a salaried individual, your gross annual income might be shown on paper. At the same time, you receive the net annual income in hand. Your employer might pay you after deducting certain taxes like TDS, deductions for Provident Fund, or EPF. On the other hand, some employers pay you the gross annual income, and you have to pay all the taxes as applicable while filing your returns, including income tax.

Income For Businesses

In the case of businesses, gross annual income is the company’s total income in a fiscal year. The net annual income is calculated after considering necessary expenses like paying salary, taxes, transportation bills, and office utility bills. The profit is considered the net annual income in most cases.

A company’s annual income is calculated based on income generated by selling services and products. They could also sell shares of the company and receive capital gains. Selling outdated equipment or any interest from any stocks in the company’s name would be considered income. Any fees derived from the company’s intellectual property would also be a part of the annual pay.

Sources of Income That Can Constitute Your Annual Income

Sources of Income That Can Constitute Your Annual Income

While the salary from your day job is usually considered your primary source of income, other sources of income can also contribute to your annual pay. Hence, while calculating the annual pay, here are the different income types you should consider.

1. Employment Wage

Your employment wage, or salary is of course your primary source of income. You could be paid monthly, fortnightly, daily, or even hourly by your employer. However, salaried employees are usually paid monthly.

In case you work two jobs- one during the weekdays while another during the weekends, or one during the day while another on the night shift, then the salary from both the jobs should be taken into consideration.

2. Commissions, Overtime, and Bonuses

Commissions, Overtime, and Bonuses

Your employer might award you certain benefits from time to time, based on your performance or simply as an added perk. You might be awarded a handsome bonus during the holiday season or when the company makes a healthy profit in a fiscal year.

You might be paid overtime for any extra hours you have put in. In addition, depending on your line of work, especially if it is sales, you might earn commissions over and above your base salary. All of it will go towards your annual pay.

3. Income From Self Employment

Despite having a good job, you might have a passion for something more creative, and you could turn it into a source of income. So, you paint during the weekends and make additional money by selling your paintings. You might have a good voice and sing in exclusive clubs over the weekends.

Or, you might have a passion for writing and could be writing columns for a magazine as a freelance writer. Any income from being self-employed would contribute towards your annual pay.

Bonus Read: 22 Lucrative Part-Time Work From Home Jobs in 2022.

4. Income From Investments

Suppose you have fixed deposits or monthly investment schemes from which you can draw yearly income in the form of interest. In that case, it will be considered a source of income. Stocks, bonds, and income from any insurance or mutual funds should also be considered.

5. Income From Rental Properties

If you have an additional property that you have put out for rent or a spare car that someone uses as a taxi and pays you a share, that will be considered a source of income. You can deduct the amount that you bear for expenses regarding maintenance depending on whether you are calculating gross or net income.

6. Pension, Child Support, or Disability

Any kind of assistance that you might get from the government with regard to pension or child support should be calculated as income. You might get disability benefits as well in someone in the family has unique needs. Although these benefits are usually tax-free, you have to calculate them as a source of income, especially if they make up the bulk of your annual income, as in the case of pensioners.

How to Calculate Your Annual Pay?

How to Calculate Your Annual Pay

Now that you know all about the different types of income that can be considered a part of your annual pay, the rest is relatively simple. Here is how to do so.

Making a List of All The Sources

Not everyone has properties on rent or a part-time gig, and not everyone gets a pension or child support. Hence, once you decide to calculate your annual pay, make a list of all the sources of income as applicable to your situation. It would include income from your primary profession or business and any rental property, interest, government scheme, or any other source as applicable.

Make Separate Tabs

For ease of calculation, maintain separate tabs for the different sources of income for each month. For example, you might have income from your salary, weekend gigs, and child support. Make three tabs for each category and put the figure from the three sources under each tab. Now add the tabs showing your monthly income in a particular month.

Add Your Monthly Incomes

Once you have the total figures for all twelve months of a given fiscal year, add them up. In addition, you might have an extra tab if you are paid in lumps annually from any investment interest. Add the figure to the total, showing the total income in a given fiscal year. This is your gross annual pay if you have not deducted any taxes.

Calculate Your Net Income

Once you have calculated the gross annual income figure, you need to subtract taxes and other deductibles to arrive at your net annual pay. This is the money you get, which you can spend as you like, like paying your utility bills and other expenses. Your taxable income is the amount of taxes deducted from your gross annual income. This will include income tax and other taxes specific to your profession.

Example of Calculating Your Annual Income

You can use this as an example to calculate your annual pay. Customize the income rates based on your sources of income.

Suppose Ryan makes $6000 monthly at his job as a sub-editor in a publishing house. That makes it $72,000 per annum.

He also earns $8000 every year through freelance proofreading gigs.

He also earns a rent of $400 a month by renting out his grandfather’s cottage as a vacation home, which is now his property through inheritance. Here, he makes an additional $4800 per annum.

Hence, his total annual income from his salary, his freelance project and rental income is $72,000 + $8000 + $4800 = $84,800.

Hence, $84,800 is Ryan’s gross income in a year. Once he deducts all the taxes, he is left with the net annual income.


You might have thought about what does annual pay mean and that calculating your annual income is a difficult task. But, it is not. Doing your taxes might be a bit complicated, but you can always seek professional help to file your taxes. Once you have paid all the taxes, you are free to spend your money as you wish and save a portion by investing it in your future. You will have a better idea of whether you should try to earn more by considering inflation and other factors.

Having a sound knowledge of the different sources and amounts of income can help you control your finances confidently.