What is gross income

Gross income describes the total amount of money an entity earns over a certain period. 

For an individual, gross pay indicates their total earnings before tax or deductions.

Companies also measure gross income, which can be described as gross margin or gross profit. It refers to their revenue from all sources minus the cost of goods sold (COGS).

What is gross income?

An individual’s gross income includes wages and annual salary as well as pensions, interest, dividends, and rental income. 

The total gross income is the starting point for an income tax return. After considering deductions and exemptions, individuals have an adjusted gross income. Finally, taxable income is calculated.

When calculating business gross income, subtract COGS from total revenue. Businesses often use gross income (instead of net income) to determine product-specific performance and indicate the company’s profitability. 

Usually, a company’s income statement stipulates the gross income, although it’s not required.

Gross income vs. net income

Gross income and net income are two different figures determined by significant factors.

Individual net income

An individual’s gross income includes their salary or hourly wages before deductions or withholdings. 

Net income describes the take-home pay, calculated by subtracting all deductions and personal expenses from gross income. These expenses include health insurance, such as Medicare, and retirement plans, such as IRA. Usually, an individual’s net income resembles the figure on their pay stub. 

Business net income

Business net income is the total amount of revenue minus the total amount of expenses beyond COGS. While gross income offers a higher view of the company, net income considers all costs involved in the business.

If the books reflect a positive net income, then the business is making a profit. A negative net income reveals that the business has incurred a loss. A significant difference between gross income and net income suggests that the business has a lot of expenses (some of which may be unnecessary). 

How to calculate gross income

Certain instances, such as approaching lenders or securing a rental agreement, demand that applicants stipulate their gross income. Gross income is also the first step in calculating federal income tax.

Calculating gross income for an individual

An individual’s gross income is the total of all sources of income, such as the following, contributing to an individual’s total income.

• Employment annual income (before tax deductions)
• Dividends on stock 
• Capital gains
• Alimony
• Pension
• Income from rental property
• Interest from investments and a savings bank account

After adding each income source, subtract above-the-line tax deductions. The adjusted gross income (AGI) remains. 

Total gross income is also reflected in the US on the year-end W-2 or 1099 form submitted to the IRS.

Note: Inheritance, municipal or state bonds, social security benefits, and life insurance proceeds are examples of non-taxable income.

Calculating gross income for a business

Gross income is usually measured over a year, but businesses may report their gross income quarterly.

The formula for calculating the gross income for a business is fairly straightforward;

Gross income = Gross revenue - COGS

The cost of goods sold is calculated by adding all direct costs in producing or providing goods and services. COGS does not include other business costs related to running the business, such as payroll taxes, equipment, and marketing.

How to calculate your monthly gross income

Gross monthly income refers to an individual’s earned income or business income within a single month before considering taxes or deductions.

Two easy methods to calculate an individual’s monthly gross income includes;

1. Review the pay stub and determine the monthly salary before taxes
2. Calculate the number of hours you work in a month and multiply the figure by your hourly rate
3. Divide your annual salary by 12 (months)

The above methods can be applied to a full-time employee, self-employed contractor, or freelancer. Take note that all other forms of income should be considered, such as investments, side hustles, and child support payments.

When calculating a business’s monthly gross income, the same formula of Gross income = Gross revenue - COGS is used with monthly figures.  

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