What Is Gross Income And How Is It Calculated?

Whether you're an individual calculating your salary-based earnings or a company evaluating profitability, knowing how to calculate and interpret gross income is essential for making informed financial decisions.

What Is Gross Income And Why Does It Matter?

Gross income or gross pay is the amount you earn from all forms of income before taxes and other deductions, such as Social Security benefits or retirement. Net income is the amount you’ll have after taxes and deductions.

Gross income looks different when you consider the differences between individual income and business gross income. Individual income refers to the money earned by an individual through sources such as employment, investments, or rental properties, often received through direct deposit, while business gross revenue represents the total income generated by a business before subtracting expenses and taxes. Knowing your gross income as an individual can help when you assess your financial health and plan for taxes, while businesses use gross revenue to gauge their sales performance, determine pricing strategies, and understand their revenue trends to make informed financial decisions.

Why Gross Income Matters

Your gross income is useful in several instances. Most importantly, your gross income is a key piece of information that the IRS uses to calculate how much you owe in taxes, which is indicated on your yearly tax returns.

Gross income is an important factor that lenders review when determining whether or not you qualify for a loan. Your gross income almost always needs to meet a specific minimum requirement set by the lender which helps them approve or deny your requested loan.

Gross income is a factor that is considered in plenty of other financial interactions one may have, such as preparing to rent a home or applying for a credit card. Landlords consider your gross income to help determine your ability to pay for the home. Similarly, credit card issuers refer use it when they set your credit card limit.

How To Calculate Gross Annual Income

Your gross income is a fairly easy number to calculate and can be determined with information that should be readily available to anybody.

From A Salary

To calculate your gross income from your salary, all of the necessary information typically appears on your pay stub or pay statement. Plenty of times, your monthly gross income is listed in plain sight on the document, while other times, it is just the largest number on the document. This number does not include the money you owe to the government (taxes) and can be multiplied by 12 to find out your annual gross income. Understanding your annual gross income is important not only for budgeting but also for assessing your financial health, such as calculating your debt-to-income ratio.

For instance, if your pay stub indicates that your monthly income is $5,000, your gross annual income can be found by simply multiplying this by 12 (5,000 x 12 = $60,000).

From An Hourly Wage

If you work based on an hourly rate, the amount you make hourly would be considered your gross hourly wage. This amount can be found on your pay stub, which should break down your hourly wage, number of hours, and the total amount you earned that pay period.

If you work steady hours, it’s easier to calculate your gross monthly or annual income. All you have to do is multiply the number of hours you work in a month or year by your hourly wage. For example, if you’re guaranteed 120 hours per month at a $20 hourly rate, your gross monthly income would be $2,400 (120 × 20 = $2,400).

For A Business

Calculating the gross income or profit of a company requires more unique information. Business calculates their gross income by subtracting their cost of goods sold (COGS) from revenue, otherwise known as sales. Businesses also consider other financial factors, such as gross margin, which measures profitability as a percentage of revenue. Moreover, they may generate additional income from sources like capital gains, contributing to their overall business income.

Gross profit = Total revenue - COGS

For example, if a company makes $1,500,000 in a year and reports $500,000 in COGS, its gross profit would equal $1,000,000 ($1,500,000 − $500,000 = $1,000,000).

Gross Income Vs. Net Income

Net income, also known as take-home pay, is your gross income minus taxes and other deductions. For businesses, these deductions may include operating expenses or depreciation. The price before all these deductions is known as gross income.

You can find a breakdown of your net pay by looking at your pay stub or checking out your online payroll account. If you’re unsure, contact your HR department or the relevant advisor if you’re self-employed.

Common Deductions From Gross Income

Deductions from your gross income can look different for every employee, however, some of the most common ones include but are not limited to:

• Benefits/insurance payments
  • Health insurance
  • Life insurance
• Monthly Retirement contributions
  • 401(k) or IRA payments
• Loan payments
• Social security tax
• Federal income tax
• State tax
• Child support payments
• Alimony payments

Gross Income Vs. Adjusted Gross Income

Adjusted gross income is simply your gross income minus a few deductions qualified by the IRS. These deductions can include student loan interest, traditional IRS contributions, health savings account (HSA) contributions, and more. Your AGI is a crucial figure when calculating your taxable income, assessing eligibility for tax credits and deductions, and establishing the basis for tax liabilities and refunds on your annual tax return. In comparison, your gross income has zero deductions.

Gross Income Vs. Modified Adjusted Income

Modified adjusted gross income (MAGI) uses your AGI and adds some deductions back in. These deductions can include, for example, foreign income earned, or passive income.

Your MAGI determines your eligibility for certain tax credits and Roth IRA contributions. In contrast, gross income considers all earned income sources before deductions.

Gross Income FAQs

Gross income and other crucial financial figures can pose many questions. Here are some of the most commonly asked questions related to gross income.

What is net income vs. gross?

Gross income is your total earnings, while net earnings are your gross income, minus taxes and other deductions. Your net income is the actual profit or take-home pay that can be used for spending or saving.

Which is higher – gross or net?

Net income is the amount of profit that remains after deductions and expenses are subtracted. Meanwhile, gross income does not take into account any deductions or taxes, making gross income typically higher than net income.

Are advertised salaries gross or net income?

The advertised salaries that you may see on job listings are typically gross income. The deductions that result in net income vary from employee to employee, making it easier and more accurate to advertise a gross income.

The Bottom Line: Know Your Gross Annual Income To Advance Your Financial Goals

Gross income serves as a fundamental financial metric, playing a pivotal role in both personal and business financial landscapes. It provides a snapshot of earnings before various deductions and adjustments, offering valuable insights into overall financial health. As we've explored its significance, calculation methods, and distinctions from other income types in this article, you’re more equipped to take charge of your financial future. To do so effectively, consider downloading the Rocket Money℠ app to help track your finances.