# Annualized Income Definition, Formula, Example

## What Is Annualized Income?

Annualized income is an estimate of the amount?of money that an individual, a business, or an investment generates over a year's time. It is calculated based on less than one year's worth of data, so it is only an approximation of total income for the year.

Annualized income numbers are useful for creating a budget and for calculating estimated income tax payments.

### Key Takeaways

• Annualizing income is useful for anyone whose income varies dramatically through the year, or anyone who has several sources of income that are paid on different schedules.
• To annualize income based on less than one year of data, multiply?total earned income by the ratio of the number of months in a year divided by the number of months for which income data is available.
• This gives you a realistic number for monthly budgeting or estimated taxes due.

## Understanding Annualized Income

Annualized income can be calculated by multiplying the earned income figure by the ratio of the number of months in a year divided by the number of months for which income data is available.

## What Is the Formula for Annualized Income?

The formula is simple if you have 12 months of data: Add up the monthly income received during a period of 12 months. Divide by 12. There's your annualized income.

If you have less than 12 months of data, multiply the earned income figure by the ratio of the number of months in a year divided by the number of months for which the data is available. That should yield a reasonable estimate.

## Why Would I Want to Annualize My Income?

If your income varies drastically throughout the year, calculating your annualized income helps you budget sensibly. If, for example, you grow Christmas trees for a living, most or all of your income will come at the end of the year but you have to cover your monthly expenses for the entire 12 months. Annualizing gives you a good estimate of how much you'll have to spend.

Similiarly, some people have side gigs or seasonal income sources that add substantially to their incomes. Calculating annualized income tells them how much extra income they'll have year round.

## Should I Annualize Income for My Business?

If you're running your own business, you're paying your estimated taxes due on a quarterly basis. Many businesses experience big swings in revenue seasonally. Calculating your business' annualized revenue allows you to budget properly for the entire year. It also helps you estimate the taxes you owe accurately.

## The Bottom Line

Annualized income is a useful calculation for anyone whose income varies greatly from month to month or whose income comes from a variety of sources that are paid on different schedules.

If you're one of those people, annualization can help you budget your money from month to month. It also can help you accurately estimate the amount of taxes you owe.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
1. Internal Revenue Service. "Tax Withholding for Individuals."

2. Internal Revenue Service. "Estimated Taxes."

3. Internal Revenue Service. "2022 Form 2210." Page 3.

4. Internal Revenue Service. "Instructions for Form 2210 (2022)."

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