Gross income isn’t a way to express your disgust about your paycheck but rather a way to describe income that doesn’t yet have any expenses or deductions accounted for. It’s often referred to as the “top line” on an income statement or personal financial statement. It’s the difference between what you earn and what you get to keep in your pocket.
Gross income can be useful to create standard calculations for a number of applications in lending, investing, and tax liability. It’s a number that reflects income from a more absolute standpoint.
For example, if you wanted to understand how an individual’s or business’s capacity to earn money changes from year to year, you can look gross income.
Gross income for individuals
From a wage earner’s perspective, gross income is money earned before things like taxes or other deductions are taken out. Often your gross income is what you will see on the top line of your pay stub. From here deductions could include:
Taxes
Any other government mandated contributions (i.e. Medicare, Social Security, Canada Pension Plan, etc.)
Private healthcare insurance premiums
Tax-favored retirement contributions
Union fees
Charitable donations
If you work for a company, your annual salary is often expressed as a gross figure. For instance, if your salary is $75,000 per year, you will likely only see a portion of that as your take home pay. The amount of money that ends up going into your bank account could be significantly less based on the amount of taxes and other deductions taken from your paycheck every pay period.
Gross income can include your wages from your annual salary as well as monies received from:
Tips
Rental income
Dividend payments
Alimony
Child support
Social security income
Pension income
Gifts or trust fund payouts
Business income
Other jobs or side-hustles
For financial applications like mortgage loans and credit card applications, your annual income, which is usually gross income, is used for qualification purposes and to determine your card limit. In order to determine your creditworthiness, your debt-to-income ratio (DTI) is used. Gross income helps the credit card issuers perform this calculation.
In order to receive funds from certain charitable programs your gross income is considered. If your gross income is too high based on your household size, you could be ineligible for certain types of assistance or grants. When you are applying for certain income-based repayment programs for federal student loans, a type of gross income (adjusted gross income) is used to determine the payment you can afford.
Gross income for companies
For businesses, gross income is the same as revenue from company sales. This number is straightforward and doesn’t account for any expenses a company may have whatsoever. However, on an income statement, you’ll usually see gross profit which is company revenues minus the cost of goods sold (COGS.) COGS is what it costs a company to produce their products or provide their services that are for sale.
The last figure on your pay stub, usually towards the bottom, is your net income. In between those two figures you’ll see the various deductions and expenses that come out of your paycheck each week.
How to calculate gross income
If you’re receiving a paycheck, you can calculate your gross income, per pay period, by adding up the hours you worked (or if you are salaried, what you earn per pay period) plus any tips, overtime pay or additional income received. This figure will be your gross income if you only earn money through a single employer.
If you’ve got additional sources of income, like a second job or side-hustle income, you would add these amounts to your regular paycheck to arrive at your gross income number as well. You will also need to include all other forms of income as mentioned above (alimony, dividend payments, etc.)
Many times, you don’t have to calculate it, because your employer will do it for you on your pay stub.
For a business, the gross income is calculated by adding all sources of income related to the company’s core business operations. So earnings like interest, settlements, miscellaneous income, etc. would not be in this number. Typically this number is called revenue and gross profit, a number more commonly see on income statements, is revenues less the cost of goods sold.
Types of gross income
There are a few types of gross income. Let's review them here.
Adjusted gross income
Adjusted gross income (AGI) is a calculation often used for tax purposes. Your AGI is your total taxable income. It includes income from a job or self-employment, dividends and interest less certain deductions you might be eligible for. Your AGI can be reached with one or more of the following deductions from your income:
Self-employed SEP, SIMPLE, and qualified plans
Self-employment tax (half)
Healthcare savings account (HSA)
Alimony payments
Moving expenses for active duty military
Losses from property sale (or exchange)
School tuition, fees, and student loan interest
Some business expenses for certain business types and occupations
Certain deductions and credits are subject to AGI limitations. Typically, the lower your AGI, the more deductions and credit you could receive from a tax perspective.
Modified Adjusted Gross Income (MAGI)
MAGI is your AGI with tax-exempt interest income and some deductions added back. This figure is used to determine your eligibility to contribute to an IRA, deduct IRA contributions or if you are eligible for the premium tax credit. The premium tax credit can lower your insurance premiums if you buy insurance on the Health Insurance Marketplace. Finally, your MAGI can also be used to determine your eligibility for some education and income tax credits.
