What is Gross Income?
The term gross income applies to both individuals and businesses. For individuals, gross income — sometimes called gross pay — typically refers to how much you receive in your paycheck before your deductions and taxes are taken out. Individual gross income also includes the total amount of all other income you receive from all other sources (before taxes and deductions.) This may include property or services you receive as payment, bonuses or barter.
A business’s gross income, also called its gross profit, is the company’s total revenue minus the cost of goods or services sold. These costs include all costs associated with running the business. Business gross income is often used as a measure of the business’s profitability.
- Adjusted Gross Income
- Adjusted gross income — also known as AGI — appears on your tax form. AGI takes your gross income and subtracts the tax deductions, tax exemptions, tax credits or other adjustments for which you qualify. This calculates the portion of your income which will be taxed and is used to identify you for e-filing your income tax return.
- Net Income
- Net income, for an individual, is also known as your take-home pay. In other words, it’s the amount of money you have left over after deductions and taxes are taken out of your gross income.
Other Terms Associated With Gross Income
Where Does Gross Income Come From?
Your gross income, the total of all money you earn from all sources, can come in many forms.
Sources used in determining an individual’s gross income include:
- Alimony payments you receive
- Annuity income
- Bonuses
- Business income if you are self-employed
- Capital gains on investments
- Commissions
- Dividends from stocks or bonds
- Gambling winnings
- Income from inheritance
- Income from interest on a trust or estate
- Interest income from bank accounts, certificates of deposit (CDs) or other savings accounts
- Money earned from selling goods or services online or in person
- Rental income
- Royalties
- Salary or hourly wages
- Tips
Source: Legal Information Institute
Some forms of gross income may be nontaxable — meaning they won’t affect your income tax rate, tax payments or tax bracket. These types of income include inheritances, life insurance payouts, returns on municipal or state bonds, workers’ compensation and certain other types of income.
Read More: Investing for Beginners
Calculating Your Gross Income
Calculating your gross income is simple: Add up all the sources of income you receive, before taxes and other deductions, and the total is your gross income.
To calculate your monthly gross income, simply divide your annual total by 12 (or divide by 52 for your weekly gross income.)
Why Is Understanding Gross Income Important?
Banks, credit cards, auto dealerships and other lenders use your gross income to determine how much credit they will give you or how much money they will loan you.
Lenders use a debt-to-income ratio, or DTI, to calculate how much they are willing to risk on you. The higher the DTI, the higher the interest you will be charged. Typically, lenders will not issue a loan if your debt is 36 percent or more of your gross income.
Knowing your gross income can help you determine if you can get an affordable car loan or mortgage. Understanding your DTI can also help you make wise personal finance decisions that keep you from going too deeply into debt.
