Let’s say you run a small coffee shop. You sell different kinds of coffee drinks to your customers all day long. The total sum of money collected from the sale of these coffee drinks, before any expenses are deducted, is known as your gross income.
Understanding gross income is an essential first step in managing your finances for individuals and businesses. In this article, we’ll break it down in simple terms so you can grasp it in just 3 minutes!
Understanding Gross Income
What Is Gross Income?
Gross income is the total money an individual or business earns before any taxes or deductions are taken.
- For individuals, gross income encompasses all sources of income, such as wages, salaries, bonuses, tips, rental income, and investment gains.
- For businesses, it is the total revenue generated from sales or services before subtracting the cost of goods sold or operating expenses.
Think of gross income as a raw figure that shows your earning potential, whether you’re an individual or a business. By knowing your gross income, you can better plan your budget, understand your tax obligations, and set realistic financial goals. Gross income provides a clear picture of your financial health before making any adjustments.
Gross income quickly shows how much money can be made before any costs or taxes are considered. This number is significant for both people and companies because it helps them keep track of their finances and is used to figure out things like net income and taxable income.
Gross Income vs. Net Income
While gross income is the total amount earned before any deductions, net income remains after subtracting all expenses and deductions. Think of gross income as your starting point and net income as your take-home pay or profit.
For individuals, net income is the amount left after taxes, insurance premiums, retirement contributions, and other deductions are taken from your gross income. It’s the actual amount you have available to spend or save.
For businesses, net income is the profit remaining after all operating expenses, taxes, interest, and other costs have been deducted from the gross income. It’s a crucial indicator of a company’s profitability and financial health.
How to Calculate Gross Income
Calculating gross income is straightforward, but the method depends on whether you’re calculating personal or business income.
Individual Gross Income
AGI adjusted gross income is calculated by deducting all allowable deductions from total income and any further adjustments to income. For individuals, add up all adjustments of income before taxes and deductions, such as:
- Salaries or wages.
- Self-employment income (freelance work, side hustles, etc.).
- Commissions and bonuses.
- Rental income.
- Investment income (like dividends or interest).
- Other income (unemployment benefits, alimony payments, or government benefits).
To calculate your gross income, add all your income from different sources for a specific period (e.g., monthly or yearly) and apply this formula:
Adjusted Gross Income (AGI) = Gross income - Adjustments
Business Gross Income
Businesses calculate their gross income by deducting their cost of goods sold (COGS) from their total revenue. The formula looks like this:
Gross Income = Total Revenue - Cost of Goods Sold (COGS)
Note: COGS represents the direct costs of producing or delivering the goods or services sold.
Gross Income Examples
Examining a few real-world situations may fully attain an understanding of gross revenue. These examples will show how gross income is computed for individuals and corporations, demystifying the process and emphasizing how important it is to understand gross income. They will also better understand how it is applied in real-world circumstances.
Let’s take a look at a few sample situations to observe gross revenue in action.
Individual Gross Income Example
Imagine Lisa is a freelance graphic designer who makes $60,000 a year from various projects, earns $2,000 in interest from investments, and brings in $3,000 from selling artwork online. Lisa’s total gross annual income would be: $60,000 + $2,000 + $3,000 = $65,000.
Lisa has monthly expenses like $1,200 for rent, $300 for a student loan, and $200 for business supplies. These costs aren’t included in the gross income calculation, as gross income only accounts for total earnings before any deductions.
Last year, Lisa paid $400 a year for health insurance. This amount is a reduction that is taken out of their adjusted gross income (AGI). That is, if they keep making the same amount of money, their AGI would be:
AGI = $65,000 - $400 = $64,600
Business Gross Income Example
Let’s consider a major retail company, ABC Retail. In their consolidated statement of operations for the three months ending September 2023, ABC Retail reported total net sales of $75 billion. To produce these products, the company spent $35 billion and an additional $5 billion on services, which are part of its cost of goods sold (COGS). By subtracting the total COGS from the net sales, ABC Retail reported a gross income:
- Gross Income = $75 billion - $35 billion - $5 billion = $35 billion.
Additionally, ABC Retail incurred $6 billion in research and development costs, $5 billion in selling, general, and administrative expenses, and $3 billion in income taxes. These expenses are not included in the gross income calculation, which only considers the company’s net sales minus the COGS.
FAQs
How Can I Calculate Personal Gross Income?
Add up all your income sources before any deductions. It includes your salary, freelance or side hustle income, investment gains, and other taxable income.
What Is the Difference Between Gross and Net Income?
Gross income is the total earnings before any deductions. What remains after deducting all costs and other amounts is known as net income.
How Do You Calculate Gross Business Income?
To calculate gross business income, subtract the cost of goods sold (COGS) from total revenue. The formula is Gross Income = Total Revenue - COGS.
What Is My Monthly Gross Income?
To determine your monthly gross income, divide your annual gross income by 12. If your annual gross income is $60,000, your monthly gross income would be $5,000 ($60,000 ÷ 12).
Does Gross Income Include Taxes?
No, gross income doesn’t include taxes. Gross income is the total amount earned before any deductions, including taxes. Taxes are subtracted from gross income to determine net income.
Conclusion
Gross income is essential for everyone, including businesses. It is the basis for planning your finances, making a budget, and figuring out your taxes. Knowing your gross income, you can better handle your money, set attainable goals, and make wise choices.
Calculating your gross income and understanding its meaning can give you a better idea of your financial health. Learning about extra income is a key part of being financially successful, whether making a budget or determining the profitability of your business.
