Gross Income: A Definition
Sarah Li Cain3-minute read
October 18, 2021
When it comes to budgeting and managing your expenses, understanding the term “gross income” will help you do so efficiently. Plus, knowing what your gross annual income is and understanding various tax deductions can ease your mind when it comes time to file your taxes.
What Is Gross Income?
Gross income, also known as gross pay, is the amount of income a person earns before taking out deductions or taxes. It covers their total earnings from all sources, including wages, salaries, revenue, profits and other forms of income.
For example, your monthly salary is $4,000 but you receive a direct deposit of $2,500 because of taxes and other types of deductions taken out. When it comes time to file your taxes, you’ll start off by entering your gross income.
Gross Monthly Income
Your gross monthly income is how much you earn each month before taxes and deductions. This number is important when applying for a credit card or another type of loan because lenders or underwriters will look at how much income you have in comparison to your current debt obligations to determine whether you can afford an additional loan payment.
Gross Annual Income
Your gross annual income is based on your yearly earnings or salary before deductions (such as retirement contributions) and taxes. Lenders use your gross income to determine how risky of a borrower you are for loans, such as mortgages. Lenders typically won’t approve a loan that’s more than 28% of your gross income.
Gross profit, or gross margin, refers to a company’s gross income — a business’ total earnings minus the cost of goods sold. Cost of goods sold can include raw materials used to make a product, or cost to hire employees who manufacture those products.
Understanding How Gross Income Works
When it comes to your gross income, you should be able to see it in your pay stub or pay statement as the largest number. If you’re paid hourly, your gross income in your pay stub should be your hourly wage — you should be able to see a breakdown of your hourly wage, number of hours, and the total amount you’ve been paid for that pay period.
Individual Gross Income
An individual’s gross income is the amount of money they earn from working before taking out deductions. Think of it as your pretax salary.
Other income sources are also factored into your gross income. Some of these income streams include:
- Commissions or bonuses
- Interest from bank accounts
- Dividend payouts from investment accounts
- Freelance work
- Rental income
- Profit from selling goods (yes, your house counts)
Business Gross Income
A company’s gross income measures its revenue from the sales of its goods or services. Sometimes referred to as gross profit, business gross income offers a more complete view about a company’s financial performance because it’s the company’s revenue subtracted from their cost of goods sold. Revenue doesn’t only look at the amount of goods and services sold; it also takes into account sources such as capital gains and other types of business income.
How To Calculate Gross Income
If you’re a salaried employee, you should be able to determine your gross income by the amount mentioned in your employment contract. You can also use your regular pay statements to calculate your annual gross income. For instance, if you make $4,000 per month, then multiply that by 12 to arrive at your annual gross income of $48,000.
For hourly workers, you should also be able to determine your gross hourly wage by looking at your employment contract. To determine the total amount you’ll make over the year will depend on whether you’re guaranteed hours. If you are, take the amount of hours you’ll receive and multiply that by your hourly wage.
Otherwise, you’ll have to wait until your last pay statement to find the total amount of hours you’ve worked and to see your annual gross income.
Whether you’re a salaried or hourly employee, don’t forget to add in other sources of pre-tax income such as bonuses, interest earned, and commissions.
Gross Income Vs. Net Income
Whereas gross income is the amount of money you make before taxes and deductions, net income, also known as net pay or take-home pay, is the total of your earnings after your paycheck deductions.
Deductions can include the following:
- Income tax
- Social Security tax
- Child support or alimony payments
- 401(k) or IRA contributions
- Life insurance, health insurance or health savings account (HSA) contributions
You can find a breakdown of your net pay by looking at your pay stub or through your online payroll account. If you’re unsure, contact your HR department (or the relevant person if you’re self-employed) for more information.
What Types Of Deductions Do You Subtract From Your Gross Income To Reach Your Net Income?
Depending on your situation, you’ll have different types of deductions taken out. That being said, there are some common ones that are taken out of a taxpayer’s gross income to arrive at their net income.
These deductions include:
- Federal income tax
- State tax
- Social Security tax
- Medicare tax
- Retirement contributions
Gross Income Vs. Adjusted Gross Income
Your adjusted gross income, or AGI, is similar to your gross income but with a few small differences. For one, your AGI takes into account more deductions than your gross income does. Some of these deductions include student loan interest, moving expenses for active-duty military personnel, contributions to qualified retirement plans like an IRA and health care savings (HSA) account deductions.
Plus, not all of your gross income is taxable, whereas all of your AGI is.
Gross Income Vs. Modified Adjusted Income
Your modified adjusted gross income (MAGI) uses your AGI and adds back in certain deductions. Some deductions you can add in include foreign earned income, tax-exempt student loan interest and losses from a business partnership.
Your MAGI is used to determine your eligibility for certain tax credits and Roth IRA contributions. Gross income, on the other hand, considers all sources of income before deductions.
The Bottom Line
Understanding your gross income is the first step when it comes to making certain financial moves such as contributing to an IRA, qualifying for a loan or credit card and knowing what taxes you’ll need to pay. For more help understanding your tax and other financial obligations, check out more resources available at Rocket HQSM.
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Modified Adjusted Gross Income: What Is MAGI?
Wondering if you’re eligible for certain retirement plans or tax deductions? The answer lies in your modified adjusted gross income. Learn all about it here.
Adjusted Gross Income (AGI): Defined & Explained
AGI, or adjusted gross income, determines if taxpayers qualify for deductions, exemptions, or credits. Find out more about calculating and lowering your taxes.