What is Personal Income? How Does Personal Income Tax Work?

What is Personal Income?

Personal income is an income received by an individual in all possible ways. Personal income comprises wages, salaries, investment interest, dividends, and rental properties.

How Does Personal Income Tax Work?

Personal income is very important for an individual because personal income is used to calculate adjusted gross income or AGI again this is important from the income tax point of view.

Personal income is a very important future market because if the personal income of an individual is high then he or she will spend more on the goods which means more money is spend on the economy of the country which indicates future business expansion.

Why Personal Income Matters?

Personal income is closely related to the Gross Domestic Production or mainly known as GDP which serves as a key indicator of how much a person spends, inflationary pressure, the overall economy, and markets.

Income statistics are a very good indicator to check whether the economy of the country is down or not.

The mathematical formula for calculating personal income:

PI (personal income) = NI (national income) + Income received but not earned –Income earned but not received

What is Disposable Personal Income?

Disposable personal income or DPI is how much money an individual has spent after subtracting all the taxes including income tax, social security tax, and Medicare tax. An individual can either save their disposable personal income (DPI) or they can even spend that amount.

If an individual is self-employed then his or her DPI will be the money left after subtracting Self-Employment Tax and Income Tax.

If an individual has a small business that is incorporated, then he or she is likely not considered self-employed. Taxes will already be subtracted from your salary, so they don’t have to pay taxes on their own.

If an individual has an independent contractor, then he or she needs to pay their own taxes and should calculate their disposable income.

If a disposable personal income of an individual is high, then he or she has more money to put into the economy. An individual can use his or her DPI to determine retirement plans, budget, and spending plans.

The mathematical formula for calculating disposable personal income:

Disposable personal income (DPI) = personal income (P I) – Personal Income Taxes Disposable personal income is basically how much an individual can spend.


There is a couple name X and Y that works at a nearby firm. X wants to calculate the individual income to get an idea of how much money they make per year.

 X writes down his wages and Y’s wages as well. X works for 48 hours per week for $50 an hour, and Y works 40 hours per week for $45 per hour. This makes $2,400 per week for X and $1,800 per week for Y. They both work 52 weeks, so their annual income from wages is $1,24,800 for X and $93,600 for Y.

X father is giving him $100 per week to help him with the household expenses. This totals up to $400 per month or $20,800 per year.

Also, Y is doing some extra job to meet her expenses, and she earns $30 per hour for 9 hours per week. This totals up to $14,040 per year. Also, X and Y have some funds, and they earn a monthly interest of 8% on their $1,500 investment. This totals up to $1,440 per year.

Based on the above information, X’s income is $1,45,600 per year, and Y’s income is $107,640 per year. So, the personal income for their household is $2,53,240. This amount is the gross income of X and Y’s households.

Let’s Take Another Example for DPI:

Let’s say you are single and self-employed, and you are earning $5000. Therefore, you must calculate your self-employment tax liability, which is 15.3% of your earnings, and also federal income tax liability.

Therefore, your self-employment tax payment will be $765 (5000 x 0.153), and now your federal income tax liability according to IRS is $315.

Now, according to the DPI formula.

DPI = $5000 - $765 -$315
DPI = $3920

Therefore, your DPI is $3920 which you can use this money to pay for your essentials and non-essential needs.


Therefore, personal income means the total amount that households receive during that year. National personal income levels are highly interlinked to the Gross Domestic Product (GDP), and they serve as a key reference on consumer expenditure, inflationary pressures, the overall economy, and markets.

Income statistics also supply an excellent index for socioeconomic disproportion and inequalities that could threaten the stability of the economy down the road and consequently expect risks for the long-term prospects of the markets.

It is also an important measure to investors because it serves as an indicator of future demand for both goods and services in the market.

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