What is Gross Income?
Gross income is a topic you’re bound to come across. From your payslips to a company’s annual reporting, it is a familiar term in financial documents. As an individual or employee, understanding the concept of gross income is important for many reasons: it is key to navigating your financial life, budgeting for living expenses in general, and filing your tax returns. For business owners, too, having a clear picture of income is crucial to projecting the overall health of your company.
So what does gross income mean and how is it related to your net income? Understanding the difference between the two is the first step toward establishing good financial health. With that in mind, we’ll define gross income and explain everything you need to know in this article.
Gross Income Definition
Gross income definition is the total amount of earnings a person makes before subtracting items like taxes, Individual Retirement Accounts (IRAs), and annuities. In the case of individual income, it is also known as pre-tax or before-tax income. In a business context, it is sometimes referred to as “gross margin” or “gross profit.”
All these terms refer to the total amount of money a person makes before deductions. This means that it includes all sources of income, such as:
- Salary from employment, a secondary job, self-employment, or freelance work.
- Things sold online or at a venue, even as a hobby
- Rental property income
- Income from investments
- Pension payments
- Earnings from gambling or lottery winnings
Generally, all revenue that you earn in the taxable year is considered part of your gross annual income. An important thing to note is that gross income includes property or services received, not just income received in cash.
Adjusted Gross Income
The “what is gross annual income” question cannot be answered without understanding adjusted gross income (AGI). For most individual tax purposes, it is even more relevant than gross income. This is because it is a calculation taken from your gross income to determine what is taxable. AGI is the amount you get after you subtract your adjustments to income from your gross income. However, there is a limit to how much you can claim as deductions based on your earnings. Common adjustments on taxes include:
- Tuition and education fees
- Student loan interest
- The traditional IRA deduction
- Self-employment costs such as home office expenses, health insurance premiums, vehicle use, retirement plan contributions, and business start-up costs
- Alimony payments decreed before 2018
- Charitable deductions
- Mortgage interest
The process of figuring out and adding together all of your deductible expenses is known as itemizing deductions. However, because this is often a lengthy and intensive process, most people choose to use the standard deduction. This refers to the fixed amount that U.S. taxpayers can subtract from their income regardless of how many deductible expenses they incurred.
Additinoally, the standard deduction increased significantly in 2018 thanks to the Tax Cuts and Jobs Act and most Americans don’t have enough deductions to make itemizing worthwhile.
Personal vs. Business Gross Income
Business gross income is the total amount of money that a company earns during a given accounting time frame, minus the cost of goods sold (COGS). COGS includes the costs related to selling activities, administration, and other costs related to running the overall business.
The term business gross income is often falsely used interchangeably with gross revenue: Gross revenue refers to the earnings of a company before deduction of expenses, while gross income is the earnings minus expenses.
From the gross income meaning in business, one can discern the slight difference between companies and individuals. In business, gross earnings refer to the total revenue minus the COGS, while in individuals it means total income before tax deductions and tax charges.
On the other hand, businesses can write off far more tax deductions than individuals. For one, you cannot deduct personal, living, or family expenses from your personal gross income. However, if you have an expense from something that is used both for business and personal use, like a car, you can divide the total cost between the business and personal part and deduct the relevant amount from your business income.
A company’s gross income reveals how much money it has made on its products or services after subtracting the direct costs to make the product or provide the service, making it a simple measure of business profitability.
Examples of Gross Income
What is gross income in a real-life scenario? Let’s take a look at an example of both business and individual income.
If a person earns an annual salary of $90,000 per year, generates $10,000 yearly from a side business, and receives $10,000 per year from rental property income. Their total gross annual income is $110,000.
For a business example, assume that a shoe store sells 100 pairs of shoes at the cost of $40 a pair: its gross revenue is $4,000 in that period. The cost to make the shoes—the COGS—was $1,500. Thus, their business income for that accounting period came to $2,500.
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Just like understanding the different types of income is important, managing your debt-to-income (DTI) ratio is an essential part of your overall financial health. If debt is taking up a large portion of your income, CreditAssociates’ debt relief program might be for you. Get a free debt consultation today to get started on taking control of your finances.