What is gross income?
An individual’s gross income, also known as gross salary when referring to a paycheck, is an individual’s total income before taxes or other deductions. This includes income from all sources, not just employment, and is not limited to income received in cash; it also includes goods or services received.
For businesses, gross revenue is interchangeable with gross margin or gross profit. A company’s gross income, shown on the income statement, is revenue from all sources minus the company’s cost of goods sold (COGS).
Key points to remember
- An individual’s gross income includes income from wages and salaries as well as other forms of income including pensions, interest, dividends and rental income.
- The gross income of a business is the total revenue minus the cost of goods sold.
- Individual gross income forms part of a tax return and, after certain deductions and exemptions, becomes adjusted gross income and then taxable income.
- Individuals may also be required to report their gross income when trying to obtain a loan.
- Companies often use gross income instead of net income to better gauge the company’s product-specific performance.
Understanding Gross Income
There are different components of gross income with respect to an individual and a business. An individual can easily determine his gross income by consulting a recent payslip or by calculating his hours worked and his salary. Alternatively, a company’s gross income may require a bit more calculation.
An individual’s gross income is used by lenders or landlords to determine whether that person is a worthy borrower or renter. When filing federal and state income taxes, gross income is the starting point before subtracting deductions to determine the amount of tax owed.
A business calculates gross revenue to understand the performance of the product-specific aspect of its business. By using gross income and limiting the expenses included in the analysis, a business can better analyze what is driving success or failure. For example, if a company wants to know the performance of a specific product line, they don’t want to see the company’s rental expenses included in the performance because they are unrelated administrative expenses.
How to Calculate Gross Income
The approach to determining an individual’s gross income is slightly different from that of a business. Although the two calculations are similar, each type of entity uses different income and expense classifications.
Individual gross income
For individuals, the measure of gross income used in the tax return includes not only wages or salaries, but also other forms of income, such as tips, capital gains, rents, dividends, pensions alimony, pensions and interest. After subtracting the tax deductions above the line, the result is Adjusted Gross Income (AGI).
Some sources of income are not included in gross income for tax purposes, but may still be included in the calculation of a lender’s or creditor’s gross income. Common non-taxable sources of income are certain social security benefits, life insurance payments, certain inheritances or gifts, and interest on state or municipal bonds.
For non-tax purposes, individuals can generally use their total salary as gross income. When applying for a loan, the individual’s gross income will equal the amount of money the individual earns before taxes are deducted or expenses are paid. Some lenders may require the use of AGI to standardize gross income calculation.
Gross business income
Gross income is an item that is sometimes included in a company’s income statement. If not displayed, it is calculated as gross revenue minus COGS.
Gross revenue=Gross revenue−COGSwhere:COGS=Cost of Goods Sold
Gross revenue is sometimes referred to as gross margin. There is also gross profit margin, which is more properly defined as a percentage and is used as a measure of profitability. A company’s gross income reveals how much money it has made on its product or service after subtracting the direct costs of making the product or providing the service.
Gross business income can be calculated on a company-wide basis or on a product-specific basis. As long as the business uses a chart of accounts that tracks revenue by product and costs by product, a business can see the profit made by each product.
Although the gross revenue measure takes into account the direct cost of producing or providing goods and services, it does not include other costs related to sales activities, administration, taxes and other costs related to the management of the company as a whole.
Gross Income vs Net Income
Gross income and net income are two terms commonly used by businesses to describe profit. Both terms can also be used to explain how much money a household earns or brings home.
For an individual, net income is the total residual amount of income remaining after all personal expenses have been paid. Personal net income is calculated as the total amount of income earned minus the total amount of personal expenses. This differs from gross income which limits what can be deducted from total earned income. An individual’s net income most closely resembles the amount of their final paycheck; although the individual probably has more expenses than is deducted from their paycheck, their paycheck is a good example of how costs reduce their income.
For a business, net income is the total amount of revenue minus the total amount of expenses. These expenses include cost of goods sold, as well as gross income. However, net income also includes selling, general, administrative, tax, interest and other expenses not included in the calculation of gross income. Gross income is a much higher view of a business, while net income incorporates all facets of costs.
Since gross income incorporates both income and the specific expenses related to generating that income, gross income is often a better metric for comparing different businesses, as it analyzes how efficiently each business has generated benefits.
Examples of gross income
Example of individual gross income
Suppose an individual earns an annual salary of $75,000, earns $1,000 a year in interest in a savings account, receives $500 a year in stock dividends, and receives $10,000 a year in income from rental property. Their gross annual income is $86,500. Alternatively, the individual can calculate that his monthly gross income is around $7,200.
Imagine the same person paying $1,500 a month in rent, $450 in student loans, and $300 for a car loan. These three expenses are excluded from the calculation of gross income for non-tax purposes. An individual’s gross income only takes into account earned income.
With respect to the individual’s federal income tax, imagine that the individual paid $500 in interest on a student loan for the previous year. When filing their tax return, student loan interest is a deduction above the line used to account for adjusted gross income. Assuming the individual earned the same amount of money this year as last year, the individual’s AGI is $86,000 ($86,500 – $500).
Example of Gross Business Income
Apple’s consolidated statement of operations reported total net sales of $97.278 billion for the three-month period ending March 2022. The company spent $49.290 billion to generate these products and spent $5.429 billion additional dollars in services also as part of its cost of goods sold. Subtracting Apple’s net sales from total cost of goods sold, Apple reported gross revenue of $42.559 billion.
Apple also incurred $6.3 billion in research and development expenses, $6.2 billion in selling, general and administrative expenses, and $5.1 billion in income taxes. These three expenses are excluded from the calculation of gross income. A company’s gross income only includes the company’s net sales less COGS.
How do I calculate personal gross income?
An individual’s gross income is the total amount earned before taxes or other deductions. Usually, an employee’s paycheck will show gross pay as well as net pay. If applicable, you will also need to add other sources of income you have generated, both gross and non-net.
What is the difference between gross income and net income?
Net income is the money you actually receive from your efforts – the net pay of individuals. For businesses, it is the income that remains after all expenses have been deducted. This is different from gross income which only includes COGS and omits all other types of expenses.
How do you calculate gross business income?
A company’s gross revenue is calculated as gross revenue less cost of goods sold (COGS). If a business had product sales of $500,000 and the cost of producing those products was $100,000, its gross revenue would be $400,000.
What is my gross monthly income?
To find your personal monthly gross income, calculate the amount of money you earn each month. This amount will likely be different from the amount of money you take home or receive as payment directly from your employer.
Your gross income can be found on a pay stub as the total amount of money you earned in a given period before any deductions or taxes were removed. You can also see your total gross income on your year-end W2 or 1099. Alternatively, you can calculate your gross income as (1) your monthly salary before taxes or (2) the number of hours you will work in a given month multiplied by your hourly rate.
Does gross income include taxes?
Yes, gross income is the total amount of income a person or business has earned before any deductions against that income. Gross income is calculated as the total amount of income earned before subtracting expenses such as costs, interest and taxes.