What is Annual Income?

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What is Annual Income?
Annual income is the total amount an employee earns for a given year. This income may be classified into “gross” annual income and “net” annual income. Gross annual income is the total earnings of an employee for an entire year without taking into considerations the various taxes and other deductions. Net annual income meanwhile is a person’s total earnings for the year less taxes and/or deductions.

Deductions to a persons’ annual income may vary for different companies and organizations. But the most common deductions may also be classified into two groups – voluntary and involuntary deductions.

Involuntary deductions to annual income include those that are mandated by the government for deduction to anyone’s paycheck. These usually include withholding taxes and/or income taxes, social security contributions, and medicare taxes. Withholding taxes or income taxes are mandatory and these funds go to the government for continued delivery of services to the public. Social security deductions meanwhile are intended for the employee’s benefits in terms of retirement, disability in a future time, and assistance to family members in case of sudden death. Medicare taxes goes to a medical fund for the employee’s health and hospitalization needs.

Voluntary deductions that are common across organizations may include retirement plans (401k) and healthcare plans among others. For companies in the US, employees are encouraged to avail of the 401k plan of his/her particular employer. In this setup, an employee voluntarily agrees with the company to have specified deductions on his/her salary as part of his/her retirement benefit. Availing of the 401k plan is like an investment for an employee’s future. By allowing deductions on one’s payroll regularly, one is actually saving money for his retirement.

There are various other things that could be deducted from a person’s annual income. Some employees may opt to avail of another health insurance deduction voluntarily on top of the required medicare taxes for extra security. Others may also have other means of earning extra income outside of one’s regular job, which will add up to a person’s gross earnings annually.

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