Gross Income | What Is Gross Income? | Quicken Is Gross Income Before Or After tax

Gross Income | "What Is Gross Income"? | Quicken Is Gross Income Before Or After Tax

Your gross income is the amount of money you earn before anything is taken out for taxes or other deductions. For example, even though your monthly salary might be $3,500, you might only receive a check for $2,500. In that case, your net income would be $2,500, but your gross income is $3,500.

Significance of Gross Income

Gross income is often used by lenders as a guideline for how much they will let you borrow, such as when you're applying for a mortgage. For example, according to Bankrate.com, most lenders won't let you borrow more than 28 percent of your gross income. However, when you're figuring out your personal budget, make sure you don't spend more than your net income. Using budgeting software like Quicken can help you keep your spending in line with your income.

Major Deductions

Your gross income has portions taken out for a number of taxes before you get your hands on it. These include federal and state income taxes, which vary depending on how much money you make, and the FICA taxes -- Social Security and Medicare -- which are fixed percentages of your income. Depending on where you live, you might also have to pay local taxes. For example, if you work in Kansas City, an extra 1 percent of your gross income is taken out to cover the earnings tax.

Other Deductions

You may also have other amounts taken out from your gross income before you receive a check, depending on the benefits your employer offers. For example, you may pay your health insurance, life insurance or long-term care insurance through your employer, and your employer will deduct those amounts from your gross pay. Contributions to your retirement plan, such as a 401(k) or 403(b), also come out of your gross income.

Other Income Sources

Though it might be only a small amount, you may have more gross income than just your paycheck. Your gross income also includes earnings from rentals, other small business efforts, investments and even the interest earned on your bank account before taxes are taken out, according to the Internal Revenue Code. For example, if you make $100 in interest from your savings account, that's an extra $100 added to your gross income.

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Gross income, also known as gross pay, is an individual's total pay before taxes or other deductions. This includes income from all sources and is not limited to income received in cash, but can include property or services received.  

For companies, gross income can also be known as gross profit. In this case, a company's gross income is the revenue from all sources minus the costs of goods sold (COGS). 

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BREAKING DOWN 'Gross Income'

For some individuals, gross income is simply their salary before taxes and deductions. The dollar amount individuals receive from their paycheck after all the tax and other deductions are made is the take-home pay, also called net pay. But for other individuals, there are various types of income that should be included when calculating gross income. 

Calculating Individual Gross Income

The gross income is used by lenders or landlords to determine whether an individual is a worthy borrower or renter. When filing U.S. taxes, gross income is the starting point before subtracting deductions to determine tax owed.

Gross income can include items beyond salary or employment income. The most common items that should be included when calculating an individual's gross income include salary or wages (including tips), dividends or interest received, alimony, pension, capital gains and rental income. There are income sources that are not included in gross income for tax purposes but may still be included when calculating gross income for a lender or creditor. The most common nontaxable income sources are certain Social Security benefits, life insurance payouts, some inheritances or gifts, and state or municipal bond interest. 

As an example, let's say an individual has a $75,000 annual salary. He also generates $1,000 a year in interest from a savings account, collects $500 per year in dividends from a company he owns stock in, and receives $10,000 a year from rental property income. His gross annual income is $86,500.

Calculating Company Gross Income

Gross income is a line item that is sometimes included in a company's income statement but is not required. If not displayed, it's calculated as gross revenue minus COGS. 

Company Gross Income = Gross Revenue - Cost of Goods Sold (COGS) 

Gross income is sometimes referred to as gross margin; however, gross margin is more correctly defined as a percentage, used as a profitability metric. The gross income for a company reveals how much money it has made on its products or services after subtracting the direct costs to make the product or provide the service. 

The concepts of gross and net income have different meanings, depending on whether a business or a wage earner is being discussed. For a company, gross income equates to gross margin, which is sales minus the cost of goods sold. Thus, gross income is the amount that a business earns from the sale of goods or services, before selling, administrative, tax, and other expenses have been deducted. For a company, net income is the residual amount of earnings after all expenses have been deducted from sales. In short, gross income is an intermediate earnings figure before all expenses are included, and net income is the final amount of profit or loss after all expenses are included.

For example, a business has sales of $1,000,000, cost of goods sold of $600,000, and selling expenses of $250,000. Its gross income is $400,000 and its net income is $150,000.

The main flaw in the use of gross and net income for a business is that the gross income figure is more likely to be closely related to the results of operations, while net income can include a variety of non-operational expenses, gains, and/or losses. Thus, the two calculations are based on different sets of information, and are used in different types of analysis.

For a wage earner, gross income is the amount of salary or wages paid to the individual by an employer, before any deductions are taken. For a wage earner, net income is the residual amount of earnings after all deductions have been taken from gross pay, such as payroll taxes, garnishments, and retirement plan contributions.

For example, a person earns wages of $1,000, and $300 in deductions are taken from his paycheck. His gross income is $1,000 and his net income is $700.

Similar Terms

Gross income and net income are also known as gross profit and net profit.