What is gross income?
An individual’s gross income is your total income before taxes and other deductions. A company’s gross income is a figure calculated by taking total income minus the direct cost of producing the goods it sells, but excluding indirect expenses and taxes.
How to Calculate Gross Income
An individual’s gross income is usually the aggregate figure of their annual pre-tax salary. Simply put, it’s earnings on your salary before taxes, health insurance deductions, and other items. Gross income can also include income from other sources, including dividends from your investment portfolio or even services received in lieu of cash payments.
For a company, the approach is similar. Sometimes referred to as gross profit, this is income from all sources minus the direct cost of goods sold.
Let’s say your job pays you $90,000 in annual salary, and you earn an extra $10,000 each year through your investments in stocks and dividend-paying bonds. In this scenario, your annual gross income equals $100,000.
This amount does not take into account federal or local taxes or pre-tax deductions for items such as health insurance, so this gross income figure is not your true take-home pay.
A company’s gross income starts with the income it takes in, then subtracts from that figure the direct costs of producing the goods sold. These are direct expenses such as materials and labor and do not include all business expenses.
Let’s say a business sells 100,000 widgets at $10 each to generate $1 million in total revenue. It is the “main line” that is needed. However, each widget costs $1 in raw materials ($100,000) and an additional $1 each to send to customers ($100,000 more). There are also four employees who each earn $50,000 a year ($200,000 in total), and production equipment and installation costs add up to another ($100,000).
Add it all up and you have $1 million in revenue minus $500,000 in direct costs for a gross revenue of $500,000.
Net income includes a more accurate representation of how much money a person or business actually has. For an individual, this can be thought of as the net pay from your check each month.
For businesses, net income is similar in that it is the profit earned after accounting for almost all expenses. Net income deducts indirect costs such as administrative expenses and taxes, but also adds other sources of additional income outside of operating income, such as the sale of equipment or goods. For a business, net income can be thought of as “net income”.
Investors may think that net income is a better measure of a company’s success than gross income. However, net income can sometimes be misleading. For example, non-essential income, including asset sales or one-time deals, could inflate net income. Likewise, fluctuations in overhead expenses can mask trends in the numbers that really matter, like the cost of materials or labor.
Think of it this way: In the workplace, people don’t discuss take-home pay as a measure of their compensation. In some business cases, a “top line” approach, or looking at gross revenue, may show things that a purely “bottom line” approach may not.
To find your gross income, simply locate the largest number on your paycheck before taxes, health insurance, or other items are subtracted from it. Often this section is also labeled as “gross income” or “gross salary”. If your salary is your only source of income, that’s it! However, keep in mind that gross income isn’t just your paycheck, so you’ll also need to add other sources if you have them.
Gross personal and business income does not include taxes. Companies that calculate gross income take into account certain direct expenses such as material costs, but do not subtract their taxes or indirect costs of doing business from this accounting figure.