What is Gross Income & How to Calculate it (w/ Examples)

Gross income is a key piece of information in employee pay stubs and a business’s accounting records. It represents all earnings gained by an employee or a business within a fixed period.

Knowing how to get the values of one’s gross earnings helps calculate federal, state, and local taxes with precision.

To do that, first you need to understand gross income’s definition, how it differs from pretax and net income, what makes it vital, and how to differentiate employee gross income from a business’s gross earnings.

Let’s begin!

Key Takeaways

• Gross income represents an individual's or business’s total earnings in a pay period before taxes and deductions are subtracted.
• Net income is the total income earned after taxes, and deductions are subtracted from gross income.
• Adjusted gross income reflects an individual’s or business’s taxable income by combining all deductions and adjustments and subtracting them from the annual income.

What is Gross Income?

Gross income, also called gross earnings or gross pay, is the total earnings or compensation earned by a worker before taxes, voluntary contributions, and other adjustments are applied to their salary.

The amount of gross salary a worker receives every payday depends on the company’s set payroll cycle. They may receive their gross salary weekly, every other week, twice a month, or every month.

From a business’s perspective, gross income is the gross profit or margin. In short, it is the revenue gained from selling products and services before taxes are subtracted. Gross profit is recorded on a company’s income statement.

People are often confused by the difference between gross income vs. taxable income. If the gross income shows earnings before taxes, taxable income subtracts tax deductions (also called itemized deductions) to yield the actual amount that is taxed from an individual’s income.

What is Net Income?

Net income is the amount earned by employees after taxes, and all other deductions are subtracted from their gross pay. Similarly, net income is the profit earned by businesses after deducting their taxes and business costs from their earnings.

The net income is the final amount disbursed to employees and, consequently, the profit that business owners use to budget their business expenditures.

When comparing gross income vs. net income, keep in mind that gross income is still subject to deductions from taxes and voluntary and involuntary contributions. With net income, no further deductions are applicable.

The Importance of Gross Income

Understanding the meaning of gross income on your W-2 form, Wage, and Tax Statement is crucial. This allows you to verify how much you makeon average based on the hours you put in or the goods and services that you sell.

More specifically, here are some key scenarios where having exact information about your gross income proves essential:

Ensuring You Receive Proper Compensation

Since gross income or margin shows the money you made as it is, you have a closer look at whether you are compensated according to your hourly or daily rate. You can calculate your total gross income in a pay period and check whether it adds up to the rates indicated in your employment contract.

Monitor Sales and Regulate Business Costs

For business owners, it provides insight into which products are best-selling and which are not performing too well. Also, the profit you make before taxes makes it easier for you to accurately budget your expenses and accruals for the succeeding months.

Securing a Loan Approval

Lenders also check the borrower’s gross income and not their net earnings when assessing whether they have enough income to repay the loan. This is true for mortgages, car loans, and renting apartments.

Comparing a debtor’s gross income to the amount they plan to loan is called the debt-to-income ratio. Lenders divide the total loan amount by the number of months, or the length of time it will take for the borrower to repay their debt.

The repayment time can range from one to two years, depending on the amount and the lender’s loan policies. The resulting value is then divided once again, albeit this time, by the borrower’s monthly gross pay.

How to Calculate Gross Income

Calculating individual gross income is different from calculating business gross earnings.

You don’t really need to find a gross income calculator or software to determine your gross earnings. All you need to do is follow the steps and examples below:

Individual Gross Income

Individual gross income is the sum of an individual’s earnings. It may be in the form of compensation paid by a single employer or income earned from multiple jobs or different employers.

Your gross income is usually indicated on your paystub. But if you want to check for accuracy, simply multiply your hourly rate by the number of hours you worked in a given pay period.

If you earn income from other sources such as part-time projects, multiple employers, allowances, rent, or interest, combine all the values with your salary to get the full sum of your gross earnings.

If you are paid monthly or if you know your annual salary, simply divide your annual income by 12 to get your gross income.

Sample Calculation:

Adela generates income mainly from her 9-to-5 job as a receptionist. She also works part-time as a social media manager, where she only needs to complete 20 hours per month.

Below is a breakdown of her earnings from each of her income sources:

• Receptionist: $3,400/month
• Part-time social media manager: $19.75/hour or $395.00/week

Combine Adela’s monthly salary with her part-time earnings to get her monthly gross income:

$3,400 + $395.00 = $3795.

Business Gross Income

For business owners, the first thing you need to determine is the total revenue earned by your business in a given period. Next, get the value of the cost of the goods you have sold.

Subtract the cost of goods sold from your total revenue to get your business’s gross income.

Sample Calculation:

A local business reports a gross income of $750,000 in sales. Manufacturing their products cost them $275,000.

By subtracting the cost of goods from the business’s gross income or revenue, we get their gross business income:

$750,000 − $275,000 = $475,000

What is Adjusted Gross Income (AGI)?

A clear distinction between gross income vs. adjusted gross income is that, unlike gross income, AGI shows your taxable income by taking into account all applicable deductions on your gross earnings.

AGI is also not to be confused with net income. Net income applies to both businesses and individuals, while adjusted gross income applies to employees or individuals only.

The IRS uses adjusted gross income to evaluate and determine a taxpayer’s annual tax liability. The typical types of deductions and adjustments included when calculating adjusted gross income are:

• Contributions to Health Savings Account
• Health insurance and retirement account contributions for self-employed
• Traditional IRA contributions
• Interest payments on student loans
• Employee expenses covered by the employer related to impairment, military, or state and local government fees

To calculate AGI, enumerate all of your reported annual income or the total earnings subject to income taxes. This step applies whether you earn money from one or more income sources.

Next, combine all applicable deductions or adjustments from your taxable income. Subtract the sum of your deductions from your total annual income to yield your adjusted gross income.

Final Thoughts

Knowing whether gross income is determined before or after taxes is essential to understanding how taxes and deductions affect your regular income.

Moreover, calculating your gross, net, and adjusted gross income lets you see your annual earnings and consequently gain a clear idea of how to budget your expenses and balance them with your disposable income.