Want to better assess an investment opportunity or your own financial standing? Understanding annual net income will help you evaluate your finances and make better fiscal decisions. Learn how to calculate annual net income so you’ll always be aware of your actual take-home pay for the year.
So, what is annual net income? Annual net income is a valuation method that subtracts your expenses from your total revenue for the year. Also referred to as the “bottom line,” net annual income is usually listed at the bottom of an income statement for a company or individual. The terms “annual net income” and “net income” are often used interchangeably, but when it comes to net annual income, we’re looking at a complete year of finances. Our guide will show you how to calculate annual net income, what it means, and when to use it.
What Is Annual Net Income?
Annual net income is the remaining amount after expenses are deducted from total revenue. Net annual income can be calculated for both your personal finances and business operations.
Personal annual net income refers to the income you are left with after deductions for work-related expenses like taxes, health care premiums, and pre-tax retirement contributions. In other words, annual net income is the money you take home after factoring in the costs necessary to earn the income.
Alternatively, a business’s annual net income is a company’s revenue minus its costs, including taxes, staff salaries, inventory purchases, mortgages and interest, depreciation, utilities, overhead, and other operating expenses. A company who achieves a positive annual net income is turning a profit. When an annual net income is negative, the company is operating at a loss. When looking to invest, review the company’s net annual income — often found on the company’s corporate documents or a financial website. Compare the annual net incomes of similar companies to determine if you should invest. Remember that net income is just one of many factors to consider in an investment decision.
How to Calculate Annual Net Income
If you’re hoping to evaluate a company’s annual net income before investing, you’re in luck. Annual net income is relatively easy to find on a company’s financial statement or a financial website. You’ll want to review the number in comparison with competitors, along with other factors such as debt-to-equity and price-to-earnings ratios.
To calculate your personal annual net income, begin with your total revenue for the year and subtract your expenses.
Formula: Annual Net Income = Total Revenue – Total Expenses
Here are the types of income to include:
- Compensation from employer
- Income from a business you own
- Passive income
- Capital gains and dividends from investments
- Interest from banking or checking accounts
- Royalties from books, patents, copyrights or mineral rights
- Side jobs (i.e. babysitting, mowing lawns)
Here are the types of expenses to include:
- Taxes (state, federal, local)
- Pre-tax health care premium payments
- Retirement contributions
- Operating expenses of a business (i.e. staff salaries, property management fees)
- Flex spending account contributions (pre-tax)
To help illustrate, review the example of Sarah’s annual net income below.
Sarah’s take-home pay for the year after expenses is $36,457. From calculating this number, she can determine if she’d like to increase her earnings or make additional investments.
Annual Net Income on a Credit Card Application
When applying for a credit card, several questions are asked about your financial standing, including your rent or mortgage payment amount. But what number should you list when it asks for your annual income? On a credit card application, you should list your annual gross income, which is the total amount of your salary and other earnings prior to deductions.
In other words, your annual net income won’t be needed for a credit card application. Instead, you’ll list your gross income in an annual amount. For example, if you make $3,000 per month at your job, you would list $36,000 as your gross income (plus any additional income from a side job or residual income stream). If you receive investment dividends, for example, include that in your gross number, too. As always, be honest about your financial situation to avoid occasions of fraud.
Annual net income is an important indicator of profitability for businesses and financial success for individuals. It reveals the bottom line for the year and denotes if you’re turning a profit or operating at a loss. By reviewing net annual income, you can determine if you’d like to make adjustments to your personal finances or if you’d like to invest in a certain company. Continuing to grow in your financial savvy will help you make smart choices that will set you up for a prosperous life ahead.