Gross Income: Meaning, Formula, and How to Calculate It

Gross income is the total earnings an individual or business receives before taxes and deductions are applied. It includes wages, salaries, bonuses, and other income sources. Understanding it helps you calculate federal, state, and local taxes with precision.

To help you, we’ll provide a gross income definition and example calculations, show how it differs from pretax and net income, and how to differentiate employee gross income from a business’s gross earnings.

Let’s begin!

Key Takeaways

• Gross income represents an individual's or business’s total taxable earnings from all sources in a specified pay period, before taxes and deductions are subtracted.
• Net income is the total income earned after taxes, and deductions are subtracted from gross income.
• Adjusted gross income is a tax-specific metric determined by taking gross income and subtracting IRS-approved above-the-line adjustments.
• Gross income is an essential financial figure used to monitor sales and regulate business costs, secure loans, ensure you’ve received proper compensation, and more.
• Certain earnings (like gifts, inheritances, and some insurance payouts) are excluded from gross income calculations.

What is Gross Income?

Gross income, also called gross earnings or gross pay, is the total earnings or compensation earned by a worker before taxes, voluntary contributions, and other adjustments are applied to their salary.

The amount of gross salary a worker receives every payday depends on the company’s set payroll cycle. They may receive their gross salary weekly, every other week, twice a month, or every month.

From a business’s perspective, gross income is the gross profit or margin. In short, it is the revenue gained from selling products and services before taxes are subtracted. Gross profit is recorded on a company’s income statement.

People are often confused by the difference between gross income vs. taxable income. If the gross income shows earnings before taxes, taxable income is calculated by subtracting tax deductions (also called itemized deductions) to yield the actual amount that is taxed from an individual’s income.

That said, here’s a table outlining the key differences between total gross income and taxable income:

The Importance of Gross Income

Understanding the meaning of gross income on your W-2 form, Wage, and Tax Statement is crucial. This allows you to verify how much you make on average based on the hours you put in or the goods and services that you sell.

More specifically, here are some key scenarios where having exact information about your gross income proves essential:

Ensuring You Receive Proper Compensation

Since gross income or margin shows the money you made as it is, you have a closer look at whether you are compensated according to your hourly or daily rate. You can calculate your total gross income in a pay period and check whether it adds up to the rates indicated in your employment contract.

Monitor Sales and Regulate Business Costs

For business owners, it provides insight into which products are best-selling and which are not performing too well. Also, the profit you make before taxes makes it easier for you to accurately budget your expenses and accruals for the succeeding months.

Securing a Loan Approval

Lenders also check the borrower’s gross income and not their net earnings when assessing whether they have enough income to repay the loan. This is true for mortgages, car loans, and renting apartments.

Comparing a debtor’s gross income to the amount they plan to loan is called the debt-to-income ratio. Lenders divide the total loan amount by the number of months or the length of time it will take for the borrower to repay their debt.
The repayment time can range from one to two years, depending on the amount and the lender’s loan policies. The resulting value is then divided once again, albeit this time, by the borrower’s monthly gross pay.

What Counts as Gross Income?

According to the IRS, “all income from whatever source derived” counts as gross income, unless it is specifically exempted by law. This means gross income isn’t just your regular paycheck, but money from all streams of revenue.

Included Income

To find gross income, you must combine all taxable sources of revenue, including:

• Salary and wages. This is the standard pay you receive from your employer. It can be either an annual salary or hourly wages. It will be reported as gross income on your W-2.

• Bonuses and commissions. Performance-based incentives count toward your gross income (e.g., end-of-the-year bonuses or sales commissions).

• Rental income. Any earnings you collect from owning an investment property or even leasing out a room go into your gross income equation.

• Interest and dividends. Money you earn from high-yield savings accounts, bonds, or stock market dividend payouts goes toward your gross income.

• Freelance income. Earnings from side hustles, independent contractor work, and participation in a gig economy all count toward gross income.

Excluded Income

It’s important to note that the IRS does not consider all money that flows into your account as part of gross income. Some funds are entirely excluded and do not need to be reported as gross income. This includes:

• Gifts. Money or property received as a gift is typically not included in your gross income. However, the giver may have to pay the gift tax.

• Inheritances. Money or property you receive from a deceased relative and assets from estates are usually excluded from federal gross income.

• Certain insurance payouts. Depending on the circumstances, some disability benefits and life insurance proceeds can be exempt from your gross income. This can include life policies paid out upon the death of an insured person and most workers’ compensation payouts.

Gross Income Formula

A gross income formula varies depending on whether you’re an individual or a business.

To calculate gross income as an individual, you need to add up all forms of compensation before any taxes or pre-tax deductions are made. Here’s the formula:

• Gross Income = Salary/Wages + Bonuses + Other Income (Interest, Dividends, Rent)

Here’s an example of a calculation for an individual with multiple types of income:

• Annual salary: $60,000
• Year-end bonus: $5,000
• Dividends: $1,500
• Gross income: $60,000 + $5,000 + $1,500 = $66,500

If you’re a business owner, calculating your gross income requires subtracting the costs of creating the product or providing the service from the total sales revenue. The formula goes as follows:

• Gross Income = Revenue - Cost of Goods Sold (COGS)

Let’s see a gross income example calculation for a business:

• Revenue: $200,000
• Cost of goods and labor: $60,000

Gross income: $200,000 - $60,000 = $140,000

How to Calculate Gross Income

Calculating individual gross income is different from calculating business gross earnings.

You don’t really need to find a gross income calculator or software to determine your gross earnings. All you need to do is follow the steps and examples below:

Individual Gross Income

Individual gross income is the sum of an individual’s earnings. It may be in the form of compensation paid by a single employer or income earned from multiple jobs or different employers.

Your gross income is usually indicated on your pay stub. But if you want to check for accuracy, simply multiply your hourly rate by the number of hours you worked in a given pay period.

If you earn income from other sources such as part-time projects, multiple employers, allowances, rent, or interest, combine all the values with your salary to get the full sum of your gross earnings.

If you are paid monthly or if you know your annual salary, simply divide your annual income by 12 to get your monthly gross income.

Sample Calculation:

Adela generates income mainly from her 9-to-5 job as a receptionist. She also works part-time as a social media manager, where she only needs to complete 20 hours per month.

Below is a breakdown of her monthly earnings from each of her income sources:

• Receptionist:
  • Hourly rate: $21.25
  • Work hours per week: 40
  • Monthly gross income: $21.25 * 40 * 4 = $3,400
• Part-time social media manager
  • Hourly rate: $19.75
  • Work hours per month: 20
  • Monthly gross income: $19.75 * 20 = $395

Combine Adela’s monthly salary with her part-time earnings to get her monthly gross income:

• $3,400 + $395 = $3,795

However, if Adela had an annual salary of $60,000 with the same part-time job as a social media manager, the calculation would go as follows:

• Receptionist:
  • Annual salary: $60,000
  • Monthly monthly gross income: $60,000 / 12 = $5,000
• Part-time social media manager:
  • Monthly gross income: $395

In this case, Adela’s gross monthly income would be:

• $5,000 + $395 = $5,395

Business Gross Income

For business owners, the first thing you need to determine is the total revenue earned by your business in a given period. Next, get the value of the cost of the goods you have sold.

Subtract the cost of goods sold from your total revenue to get your business’s gross income.

Sample Calculation:

A local business reports a gross income of $750,000 in sales. Manufacturing their products cost them $275,000.

By subtracting the cost of goods from the business’s gross income or revenue, we get their gross business income:

• $750,000 − $275,000 = $475,000

Note that the business will use its $475,000 gross income to pay for additional indirect operating expenses, like warehouse rent, marketing, administrative salaries, etc. These expenses don’t reduce business gross income.

Gross Income vs. Net Income?

Net income is the amount earned by employees after taxes, and all other deductions are subtracted from their gross pay. It’s typically referred to as “take-home pay.”

Similarly, net income is the profit earned by businesses after deducting their taxes and business costs from their earnings, and it represents the final “bottom line.”

Net pay is the final amount disbursed to employees and, consequently, the profit that business owners use to budget their business expenditures.

When comparing gross vs. net pay, keep in mind that gross income is still subject to deductions from taxes and voluntary and involuntary contributions. With net income, no further deductions are applicable.

Gross income is the starting point for further deductions and your maximum earning power, while net income represents the actual cash deposited into your bank account. Here is a quick gross income vs. net income comparison:

Gross Income vs. Adjusted Gross Income (AGI)?

A clear distinction between gross income vs. adjusted gross income is that, unlike gross income, AGI shows your taxable income by taking into account all applicable deductions on your gross earnings.

AGI is also not to be confused with net income. Net income applies to both businesses and individuals, while adjusted gross income applies to employees or individuals only.

The IRS uses adjusted gross income to evaluate and determine a taxpayer’s annual tax liability. The typical types of deductions and adjustments included when calculating adjusted gross income are:

• Contributions to Health Savings Account
• Health insurance and retirement account contributions for self-employed
• Traditional IRA contributions
• Interest payments on student loans
• Employee expenses covered by the employer related to impairment, military, or state and local government fees

To calculate AGI, you need to:

• Add all of your reported annual income, or the total earnings subject to income taxes. This step applies whether you earn money from one or more income sources.

• Combine all applicable deductions or above-the-line adjustments.

• Subtract the sum of your adjustments from your total gross income to determine your adjusted gross income.

Adjusted Gross Income (AGI) Example Calculation

To calculate AGI, let’s consider John, who is making $75,000 gross income from his corporate job and $5,000 from a side business. On top of that, John paid $1,500 in student loan interest, and his deductible HSA contributions are $3,000.

Here is the calculation:

• Gross income: $75,000 + $5,000 = $80,000
• Adjustments: $1,500 + $3,000 = $4,500
• Adjusted gross income (AGI): $80,000 - $4,500 = $75,500

Where to Find Gross Income on Forms

You can find gross income on multiple key forms and financial documents, which allows you to monitor it more easily, verify your income tracking, and double-check your calculations.

These documents include:

• Tax returns. On your federal tax return (Form 1040, U.S. Individual Income Tax Return), your total gross income will be displayed on line 9 of the “Income” section. This line combines all your wages from W-2, investment income, side-hustle earnings, and other streams of revenue before AGI adjustments are made.

• Form W-2. If you’re a W-2 employee, your Wage and Tax Statement will detail your total taxable wages from your employment in Box 1. Keep in mind that this is not necessarily your gross income. This is because certain pre-tax deductions (e.g., pre-tax 401(k) or health insurance plan contributions) are excluded before Box 1 is calculated.

• Pay stubs. Pay stubs are the easiest place for employees to find their gross income. Your most recent pay stub will often include gross income for a specific period, as well as your Year-To-Date (YTD) total. If you’re a business owner or a freelancer, you can use our pay stub generator to calculate these figures and create pay stubs with ease.

Final Thoughts

Understanding gross income goes beyond recognizing the number on your pay stub. You need to know the difference between gross and net income, taxable income, AGI, and other financial concepts to optimize your cash flow and see how payroll deductions impact your earnings.

If you’re an employee, you’ll have the ability to interpret your paychecks with ease. On the other hand, as a business owner, you’ll know how to evaluate the performance of your enterprise. This will help you make better and more informed decisions, securing your long-term financial stability.

Gross Income FAQs

#1. Is gross income before or after taxes?

Gross income is always calculated before taxes. It represents the total taxable amount of money that you earn in a given period from all sources. It’s a figure before federal income tax, state tax, Social Security, Medicare taxes, and any other payroll deductions are subtracted.

#2. What is included in gross income?

For an individual, gross income includes wages, salaries, tips, bonuses, rental income, dividends, and gig economy earnings. The IRS considers all money that flows into your account in a year to be a part of your annual gross income unless explicitly exempted by law (e.g., a gift or inheritance).

#3. Is gross income the same as revenue?

No, gross income isn’t always the same as revenue. For businesses, revenue represents the total amount of money earned from sales. Gross income (or gross profit) is calculated by taking the total sales revenue and subtracting the Cost of Goods Sold (e.g., raw materials and cost of labor).

#4. Why do lenders use gross income?

Lenders use gross income to assess a borrower’s repayment ability, since it reflects their total earning capacity. Gross income is used to calculate the debt-to-income (DTI) ratio. It’s a standardized method in the loan approval process. It levels the playing field since net incomes can vary wildly depending on deductions.

#5. What is the difference between AGI and net income?

The difference between AGI and net income is that AGI is a tax-specific figure used by the IRS to calculate your tax bracket, while net income is your take-home pay. AGI is usually higher than net income since it’s derived by subtracting only specific adjustments from your gross income.