Gross annual income is the total amount of money you earn in a year before deductions are taken out. This annual income calculation is important because it helps determine how much you'll pay in income taxes.
Your gross annual income appears on line 1 of your W-2 Form whether you’re paid an hourly wage or you’re a salaried employee. It’s the total of all your earnings for the year before deductions, such as taxes, health care costs and retirement plan contributions are taken out based on a simple formula. Your yearly income may be based on a calendar year, or it could be a fiscal year if you’re self-employed and run your business and personal finances on this type of calendar.
Your gross annual income appears on line 9 of the IRS Form 1040 tax return as of tax year 2021, the return you'd file in 2022. The IRS periodically makes adjustments to Form 1040, but the line is marked "total income" so you can identify it in tax years 2022 or later.
Your total gross income will be listed on line 9 of your IRS Form 1040. Your gross earning is the sum total of all of your earnings for the year before taxes and other qualifying expenses and tax deductions are subtracted to arrive at your taxable income. It includes an hourly wage for the number of hours you worked all year as well as overtime pay, base salary and other types of income. It includes employment income and other sources of income, such as if you own a rental property so you collect rent from a tenant each month or income from retirement funds.
Independent Contractors’ Gross Annual Income Can Be Different
If you work as an independent contractor, your gross annual income is the total of your earnings for the year before costs are deducted. It’s the total of all 1099 Forms you receive for your services, plus any income you receive that was not reported on a 1099.
Like gross income from an hourly or salaried position, self-employment gross income is the starting point when you’re doing your taxes. It’s not what you actually made because your expenses haven't been subtracted yet. It's also not what you'll pay taxes on. Independent contractors pay income tax on their net income, which takes the costs of doing business into consideration, explains the IRS.
The Difference Between Gross and Net Income
Gross and net annual income are very different, and not knowing the difference could cost you. For an hourly or salaried employee, net income is what’s left after federal and state taxes, Social Security and Medicare, health and pension and/or other retirement plan contributions have all been subtracted. Your net income for tax purposes doesn't take court-ordered deductions such as alimony, child support or credit card debt into consideration, so this money is still taxable to you even though it reduces your net pay.
Net income is often referred to as take-home pay because it’s the amount of spendable money you actually get out of each paycheck. A lot of employers show year-to-date numbers on their pay stubs so you can track your gross and net income from paycheck to paycheck. If you’re self-employed or an independent contractor, your net income is what’s left after you’ve subtracted all of your business expenses from your gross income.
Net income isn’t quite the same as your adjusted gross income or AGI. Your AGI is the net result after you claim certain “above the line” deductions on Schedule 1 of the Form 1040 tax return. You can then claim the standard deduction or itemized deductions from this amount to arrive at your actual taxable income.
Why Is the Difference Important?
Gross income is used by landlords and lenders to determine how credit worthy you are. It’s also used by potential employers to help determine the amount of pay you might be willing to work for. Credit applications almost always want you to state your gross pay. You may occasionally see an application that specifies net pay, in which case that’s what you should provide.
If neither gross or net pay are specified, always state your gross pay. Giving your net pay in a situation like this could result in your being denied credit because it will look like you earn a lot less than you actually do. Similarly, when asked by a potential employer what you earned in your last position, it's generally understood that they're asking for your gross annual salary or gross pay. Don’t undersell yourself by telling them what your net pay was.
This article was written by PocketSense staff. If you have any questions, please reach out to us on our contact us page.