Gross annual income is the total amount of money you earn in a year before deductions are taken out. This number is important, as it help determines how much you pay in income taxes. If you’re an hourly or salaried employee, your gross annual income is on line 1 of your W-2 form. It is the total of all your earnings for the year before taxes, health care costs and retirement plan contributions are taken out. Gross annual income is the first dollar amount you fill in on your income tax return. It’s line 7 on Form 1040 and line 1 on Form 1040-EZ.
Independent Contractors’ Gross Annual Income
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 costs into consideration.
Difference Between Gross and Net Income
Gross and net income are very different. 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 retirement plan contributions have all been subtracted. 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
Why the Difference is 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 nor 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 pay. Don’t undersell yourself by telling them what your net pay was.