Anyone who earns money deals with gross income and needs to know the difference between gross income and other definitions of income for budgeting and tax filing.
Did you know that there are different forms of income? When you involve things like taxes, income amounts can vary depending on the kinds of taxes involved (or not involved). Different words for these different ways of looking at income help us distinguish between how we are looking at income in different scenarios. This income vocabulary is especially helpful if you want to become for financially fluent when budgeting, financing, and filing taxes.
Gross Income Definition
Gross income is the total income earned by an individual or organization before taxes and deductions are applied.
Put simply, gross income is all income before taxes. And by all income, we mean all income. Your total income should include all income you receive from all sources, not necessarily just your paychecks. This income is also all the money you received before any taxes have been taken from that income. You’ll be able to find this pre-tax, gross monthly income amount on the tax forms you receive from the people you work for, like on W2s and 1099s.
The following is a list of all the types of income that the Internal Revenue Service (IRS) includes in this amount:
- Income from compensation for services
- Income from fringe benefits and commissions
- Income from business, including small businesses
- Income from dealings in property
- Income from interest
- Income from rents, aka rental income
- Income from royalties
- Income from dividends
- Income from alimony and separate maintenance payments
- Income from annuities
- Income from life insurance
- Income from contracts for endowment insurance
- Income from pensions
- Income from discharge of a debt
- Income from distributive share of partnership
- Income from a person's death, like an inheritance
- Income from an interest in an estate or trust
What does gross income mean for individuals?
It can also be called gross pay, especially if it's referring to earned income from a paycheck. It’s income received from wages, salary, side gigs, freelance work, pensions, interests earned, dividends, payments from rental properties, and more.
What does gross income mean for businesses?
For a business, they might instead use the terms gross margin or gross profit for the total income or total profits of the company. It’s the revenue from all sources, but does not include the company's Cost of Goods Sold (CGOS).
Gross vs Net Income
Gross and net income are personal finance terms that relate to one another. They are both different ways to define someone’s earnings. If income is termed gross, that means it is the total income before taxes while net income is someone’s total earnings after taxes. In business, net income can also refer to earnings after deductions and costs too.
Sometimes net income is known as take-home pay, because it's the amount you actually take home from your paycheck.
When to Use Gross Income
There are a few instances when you might need to know your gross annual income. These instances include when you are filing taxes, applying for a loan, or applying to rent.
When filing federal and state income taxes
This is a tax term that you'll need to know when filing your federal and state income tax returns. When your taxes are getting filed, gross income is the starting point, where your income starts before taxes and deductions and credits start getting involved.
Adjusted gross income (AGI) is another tax term that you'll need to know for tax return filing. AGI is gross income after baseline tax deductions are applied. The rest of your taxes are then calculated using this AGI number instead.
There are some forms of income that don't apply to your total income calculations. These include forms of non-taxable income like social security benefits, life insurance payments, inheritance money, gifts, and bond interest. Using a tax professional can help make sure all of your income calculations are correct so you don’t get audited for a math error.
When applying for a loan
If you are applying for a loan then you might need this number to fill out your total income amount on the loan application. Lenders ask for this kind of information to help gauge your ability to repay the loan by seeing the amount of money you make.
When applying to rent
If you are applying to rent an apartment or a condo, the landlord might ask for this number as well. This helps landlords see what you earn to help gauge whether you can afford to make rent payments.
When making a budget
When creating a budget it can help to have a starting point for your total income. Start by adding up all your sources of income. This will give you a total income to start with when managing monthly expenses. This will give you a total amount of money to start your budget before you start adding things like credit card payments, savings account deposits, health insurance payments, and other monthly bills.
How to Calculate Business Gross Income
Businesses, both big and small, need to learn how to calculate business gross income so they can file taxes and keep business financial accounts. Even if you are a small business, you still might need this calculation for your business books.
For businesses this is a line item on a company's income statements. It is often shown as a percentage. To calculate business gross income, subtract the costs to make the products and services from the businesses gross revenue. Gross revenue is the total amount of profits a company has.
Gross Income = Gross Revenue – COGS
If you aren’t a business, then you might not need this calculation. Instead you just need to calculate the total amount of money or annual income you make. Start by taking how much money you make per hour and multiply it by how many hours per week you generally work. Then, take that weekly amount of money and multiply it by how many weeks there are in a year, (which is usually 52 weeks, give or take a week). This will give you your estimated gross annual income.
Estimated Gross Income = (Hourly Pay x Hours Per Week) x 52 Weeks in a Year
Brushing up on your financial vocabulary is important for your personal and professional life. It’ll help you budget better, save better, and file tax returns correctly for the best refund.