Gross income is the total earnings of an individual or business before any deductions, such as taxes, expenses, or allowances. It includes all sources of income, such as salaries, wages, bonuses, and investment returns.
Gross income vs net income
Gross income and net income are two important financial metrics that provide different insights into an individual’s or business’ earnings. Gross income refers to total earnings before any deductions, while net income is the amount remaining after all deductions and expenses are subtracted.
What affects net income?
Net income is income after deductions and withholdings are subtracted. These can include:
- Federal income tax withholdings: Taxes withheld from an individual’s paycheck based on their earnings and tax bracket.
- State income tax withholdings: State-level taxes withheld from an individual’s paycheck, which vary by state.
- Social Security and Medicare taxes: Payroll taxes that fund Social Security benefits and Medicare programs.
- Wage garnishments: Court-ordered deductions from an individual’s paycheck for child support or debt repayment.
- Health insurance premiums: Payments for health insurance coverage deducted from an individual’s paycheck.
- Retirement contributions: Contributions to retirement plans, such as 401(k) or IRA, deducted from an individual’s paycheck.
- Form W-4, Employee’s Withholding Certificate: This is the form that employees complete to determine the amount of federal income tax to withhold from their paycheck. Employees often fill this out when they start a new job to inform their employer about their filing status (single, married, head of household), dependents, and other sources of income, so they know how much to withhold.
Individual net income
Individual net income is an individual’s take-home pay after all deductions and withholdings are subtracted from their gross income. This figure represents the actual amount of money available for personal use and spending.
Business net income
Business net income is the total amount of profit a company retains after all operating expenses, taxes, and costs are deducted from its gross income. It reflects the company’s profitability and financial health.
How to calculate gross income
Calculating gross income involves adding up all sources of earnings before any deductions. The process is slightly different for individuals and businesses.
How to calculate individual gross income
To calculate individual gross income (also called gross pay), add up all sources of income, including:
- Salaries and wages: Total earnings from employment before taxes and other deductions.
- Bonuses and commissions: Additional earnings from work-related bonuses or sales commissions.
- Investment income: Earnings from dividends, interest, and other investments.
- Any other income: Any additional income sources, such as rental income, freelance work, pension, capital gains, interest on a savings bank account, or alimony.
Note that inheritance, municipal or state bonds, social security benefits, and life insurance proceeds are some examples of non-taxable income.
Example
If an individual earns $50,000 in annual salary, $5,000 in bonuses, and $2,000 from investments, their individual gross income would be $57,000.
How to calculate business gross income
To calculate business gross income (also called gross profit or gross margin), sum up all revenue generated from sales and other income sources:
- Revenue from sales: Total income from selling goods or services.
- Cost of Goods Sold (COGS): The direct costs of producing goods or services sold by the business.
Gross income for a business is calculated by subtracting COGS from total revenue.
Example
If a business has $200,000 in gross revenue and $50,000 in COGS, its gross income would be $150,000.
How to calculate monthly gross income
To calculate monthly gross income, divide the annual gross income by 12. This provides an average monthly figure, which can be useful for budgeting and financial planning.
For example, if an individual’s gross annual income is $60,000, their monthly gross income would be $5,000 ($60,000 divided by 12).
What is adjusted gross income?
An individual’s gross income is just the starting point for their tax return. Each tax year that an individual files, they’ll likely qualify for certain tax deductions, which require them to calculate their Adjusted Gross Income, or AGI.
AGI is an individual taxpayer’s gross income after specific adjustments and deductions set by the IRS. Examples include a portion of the self-employment taxes you pay if you do any freelance work, self-employed health insurance premiums, contributions to certain retirement accounts (such as a traditional IRA), student loan interest, and educator expenses.
AGI is used to file your tax returns, take the standard deduction, and qualify for tax credits and other benefits.
When to use gross income vs net income
Gross income and net income serve different purposes and are used in different contexts:
- Gross income: Often used to determine eligibility for loans, mortgages, and certain tax credits. It provides a comprehensive view of total earnings before deductions.
- Net income: Often used for budgeting, financial planning, and understanding take-home pay. It reflects the actual amount available for spending and saving after all deductions.
Gross and net income in business decisions
Whether you have a small business or a large enterprise, both gross and net income can (and should) be used for making informed business decisions.
Gross income can help assess the company’s ability to generate revenue and manage production costs. It’s also useful for pricing strategies and sales forecasting.
Net income can indicate the company’s profitability after all expenses and help evaluate overall financial health. Use it to help guide investment decisions and assess the sustainability of business operations.
Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.