The Free Dictionary defines net income as "income after payment of taxes." Net income is also commonly referred to as your take-home pay after taxes. Income before taxes is gross income. Income after taxes is net income. Therefore, net annual income is net income for a calendar year or any other 12-month period. To calculate net annual income, subtract annual taxes paid from gross annual income.
An Estimate of Net Annual Income
Wage earners receive earnings statements from their employers. The statements reflect gross income earned, taxes withheld, and net pay during the pay period and year-to-date. Wage earners can estimate net annual income by subtracting federal, state and local taxes paid year-to-date from the gross income earned year-to-date. This number is net income year-to-date. Take this amount, divide by the number of months reflected in the amount, then multiply by 12. The result is an estimate of the net annual income for the current year.
Example: Estimate of Net Annual Income
Sue is an employee. She wants to estimate her net annual income for this year. Her most recent earnings statement shows year-to-date gross income of £13,000 for four months. The total amount of taxes withheld year-to-date is shown as £2,600. Sue's net income is £13,000 minus £2,600, or £10,400. An estimate of Sue's net annual income can be determined by dividing £10,400 by 4, and multiplying by 12. Sue's estimated net annual income is £31,200.
Actual Net Annual Income
Your federal and state tax returns must be completed for you to get an actual net annual income. Taxes withheld do not reflect allowances, exemptions and deductions accepted by the Internal Revenue Service to reduce your federal tax liability. Whether you completed your own taxes or had someone else file for you, actual net annual income can be determined by reviewing your tax returns for actual taxes paid.
Actual Annual Taxes Paid
Federal and state tax return documents reflect actual annual taxes paid. For federal tax forms used in 2009, filers of 1040 can find the amount of actual tax paid on line 60, which states, "This is your total tax." Filers of 1040A in 2009 will find total tax on line 37, and filers of 1040EZ will find total tax on line 11. Social Security, Medicare, and local taxes paid during the year are shown on the wage earners' W-2 statements.
Example: Actual Net Annual Income
Sue wants to know what her actual net annual income was for 2009. Because Sue completed her own tax return, she has the information readily available. Sue's gross annual income for the year was £39,000. Her federal taxes paid for the year were £3,900, her state taxes were £650, and Social Security, Medicare and local taxes from her W-2 statement for the year totalled £1,950. Total taxes paid for the year were £6,500. Sue's actual net annual income is £39,000 minus £6,500, or £32,500.