What is gross income? Business gross income & individual gross income

Gross income is one of the most crucial financial concepts you have to learn either when starting a business or working as an employee. Gross income is a metric that is used to evaluate a company or calculate taxes.

In this blog, we will give you an overview of both business and individual gross income.

Table of contents

What is Gross Income?

Definition of gross income
Definition of gross income

Gross income, in general, is the total amount a business or an individual earns over a specific period of time. It can be measured and reported on a monthly, quarterly, or yearly basis.

Regardless of whether you are a corporate or a single person, gross income appears as one of the top-line numbers on financial reports or income tax forms. This figure will be reduced by other expenses or deductions.

Gross income has different applications to companies and individuals. In short, for a business, gross income refers to total revenue minus the cost of goods sold. Meanwhile, for an individual, gross income is total income before tax deductions and tax charges.

We will have a more in-depth look into these distinctions below.

Business Gross Income

For a corporate, gross income is interchangeably used with the term gross margin or gross profit. Business gross income represents the amount of the total revenue from sales of goods or services lessen the cost of goods or service sold. It is critical to take note that gross income does not take into account all of the operating expenses or business expenses.

When you deduct the expenses used to manufacture products or provide services from the sales revenue, then you get gross income. Sales revenue or net sales is calculated by subtracting merchandise returns, allowances, rebates, and discounts from gross sales.

Gross income is the simplest way to measure a company’s profitability. It helps the firm to track the amount they generate before operating expenses and taxes counted.

This figure often appears on the income statement as gross profit. When it is reduced by other deductions, we get net income or net earnings.

Gross income on the income statement
Gross income on the income statement

Gross income, however, is not always required to be reported on financial statements. Some might leave it off as the following example.

Income statement without gross income
Income statement without gross income

Individual Gross Income

For an individual, gross income is often interchangeably used with gross pay, gross earnings, or gross wages. Individual gross income is the total income earned from all sources before taxes and other deductions.

Gross income for an individual includes earnings from wages and salaries, which appear on a paycheck, plus other sources of money such as bonuses, alimony, interest, dividends, pensions, etc. Personal gross income also consists of net gains on disposal of assets, money earned from self-employment, side jobs.

Individual gross income is reported on the income tax return form to calculate a person’s liabilities to state, federal, and local governments.

Gross income on the income tax return
Gross income on the income tax return

After subtracting expenses and some deductions from gross income, you get the adjusted gross income. Adjusted gross income minuses other itemized deductions and standard deductions, results in taxable income.

Taxable income calculation
Taxable income calculation

Depending on the amount of deduction or exemption that is applied, taxable income can be significantly less than gross income.

As gross income is closely related to other crucial financial indicators, we will dive into these figures to get a deeper understanding.

Gross income vs other financial indicators
Gross income vs other financial indicators

What is Gross Annual Income?

Gross annual income refers to the total earnings before deductions during a fiscal year. The concept of gross annual income is vital to both individuals and businesses, especially when it comes to preparing income tax returns or applying for loans.

Personal gross annual income is the amount you earn in one year before taxes and deductions. Your gross annual income includes your salary, bonuses, overtime, commissions, and any other sources of income.

If you are a full-time employee, then you properly receive a paycheck. You can calculate your gross annual income by multiplying the amount of the paycheck by the number of pay cycles. If you receive a paycheck once a month, then multiply by 12. If you receive it weekly, then multiply by 52.

If you are an hourly wage earner, you can calculate your gross annual income by multiplying the number of hours worked during the year by the hourly rate.

Gross annual income is the base number you will start with when filing your income taxes. Knowing your gross annual income helps you have an awareness of what taxes you owe or be returned. You will also use your gross annual income when applying for a loan or credit card, or proving child support and alimony.

Business gross annual income refers to all earnings your business generates during the fiscal year. Gross annual income in a company is calculated by deducting the cost of goods sold from the total company sales.

Gross annual income is a critical figure that investors look at when evaluating a potential company.

What is Gross Monthly Income?

Gross monthly income is a financial term that is more commonly used for individuals. Gross monthly income refers to the total amount you earn in a given month before taxes and other deductions. This figure probably appears on your job offer letter and paycheck. Gross monthly income can also include additions such as overtime, bonuses, commission, etc.

If you are an employee and earn an annual salary, you can quickly compute your gross monthly income by dividing your yearly salary by 12.

If you’re paid based on an hourly basis, you will have to find your gross annual income first, Multiplying your hourly rate by the number of hours you work a week, then multiplying this amount by 52, you get your gross annual income. Dividing this figure by 12, you finally get your gross monthly income.

Your gross monthly income is a significant figure when you create a monthly budget or apply for a loan and credit card. If your gross monthly income is higher, you can obviously afford a higher mortgage amount. The more you understand your gross monthly income, the better you can assess your financial health and goals.

What is Adjusted Gross Income?

Adjusted gross income is also explicitly applicable to personal finances. Simply put, adjusted gross income is gross income minus certain deductions. When you subtract adjustments that are often referred to as above-the-line deductions from your gross income, you will get your adjusted gross income.

We use the following formula to calculate adjusted gross income.

  • Adjusted Gross Income (AGI) = Gross income - Adjustments

The adjustments often include:

  • Educator expenses, such as supplies paid for by teachers
  • Business expenses including gas mileage or equipment rental fees
  • Moving expenses
  • Health care savings account deduction
  • College tuition and fees
  • Student loan interest
  • Contributions to certain retirement accounts
  • Penalties from financial institutions for early withdrawal of savings
  • Jury duty pay sent directly to the juror’s employer
  • Alimony payments

These adjustments can be changed over the year by the tax laws. And they will appear on the income tax form.

Calculating adjusted gross income is a critical step to determine your taxable income, your income tax, as well as your eligibility for tax credits and tax exemptions.

How to calculate gross income?

Gross income calculation
Gross income calculation

Business gross income calculation

Business gross income, often known as gross profit, is calculated by deducting the direct costs incurred in producing products or providing services from the total revenue earned.

Here is the gross income for a business formula:

Gross Income = Sales Revenue – Cost of Goods Sold

First, you have to aggregate gross sales information and all deductions, including sales discounts and allowances to arrive at sales revenue or net sales.

Then, you aggregate all direct costs of goods sold information, including labor costs, supply costs, cost of raw materials, equipment used in the production process.

Finally, you subtract the direct cost of goods sold from net sales, and then you get gross income.

It is critical to make sure the information is gathered consistently from period to period.

Example of business gross income calculation:

Assume that the current period, your business has the following figures:

  • Gross revenue: $1,500,000
  • Cost of raw materials: $170,000
  • Supply costs: $90,000
  • Cost of equipment: $380,000
  • Labor costs: $180,000

The gross profit is calculated as follows:

Gross Income = (1,500,000) – (170,000 + 90,000 + 380,000 + 180,000) = (1,500,000) – (820,000) = $680,000

Related post: What are gross sales? How to calculate gross sales?

Individual gross income calculation

The gross income for a person is the total amount of money before taxes, and other deductions are taken out.

An individual can be employed under a salary or hourly wage basis.

The salary is included in the contract between an employer and an employee. This is the gross pay. If monthly gross pay is $5,000, then the employee’s annual gross income is simply calculated by ($5,000 x 12 months), which equals $60,000.

If a person receives hourly wages, then he can easily calculate his weekly, monthly, or yearly gross income by multiplying the number of hours and the total amount earned in an hour. For instance, if an individual earns $18.00 per hour, and he works 35 hours per week, then he has a gross annual income of $32,760.

A full-time employee also has other sources of income, such as bonuses, dividends on stocks held, which must be included when computing gross income.

Example of individual gross income calculation:

Assume that Mary has earned annual income from the following sources:

  • $100,000 from her full-time job
  • $70,000 from renting out her real estate properties
  • $10,000 in dividends from shares she owns at another company
  • $5,000 in interest from her savings account.

Mary’s income can be calculated as follows:

Gross Income = 100,000 + 70,000 + 10,000 + 5,000 = $185,000

Why does gross income matter?

Implications of business gross income

Gross income is an important indicator of business financial performance. Gross income represents the effectiveness of a business operation. The operation here is the day-to-day activities of what the company produces and sells.

Gross income is also used to calculate several figures that determine the firm’s profitability and viability.

Gross profit margin is one essential financial ratio. It is the percentage of sales revenue remaining after deducting the cost of goods sold. The equation is gross income divided by total sales. This calculation is measured in a percentage—the higher the percentage, the better.

For example, if gross profit is $400,000 and total sales are $1,000,000, the margin is 40%.

Implications of individual gross income

Individual gross income on tax return
Individual gross income on tax return

For individuals, gross income is the starting point to calculate personal income taxes.

An individual’s gross income is also usually used by lenders or creditors to decide how much they will let you borrow or whether they will approve your credit card application or not.

Landlords also use gross income as a determining indicator when evaluating a potential tenant will be able to pay the rental fee on time.

What’s the Difference between Gross Income and Net Income?

Gross income vs Net income
Gross income vs Net income

Gross income and net income are two common financial terms. These figures are closely related, but much different. It is critical to understand the difference between these numbers. On a personal level, it helps you evaluate your financial status. And on a corporate level, it is useful to investigate business performance.

Generally, gross income is a larger number. Gross income is the total income before deductions. Net income is typically a smaller number. That’s what is left after all expenses and taxes.

For a company, as defined above, gross income is total sales minus the cost of goods sold. Gross income indicates the revenue generated from selling products or providing services. This figure is often considered as the results of operations.

Net income, on the other hand, is calculated by the following equation:

  • Net Income = Total Revenue - Total Expense

Net income is a part of earnings after all expenses, including a variety of non-operational expenses. Net income can be a net profit or a net loss. Net income can exactly represent how much revenue exceeds the expenses of a business.

This figure appears in the income statement as an indicator of the company’s profitability.

For a wage earner, gross income refers to total earnings or pre-tax earnings. Meanwhile, net income is simply someone’s take-home pay after all deductions and taxes.

As an employee, net income is a determining figure you use to manage your monthly budget.

Both individuals and business owners should be aware of the difference between gross income and net income. Mixing up these figures can lead to some financial consequences, like incorrect tax returns, which finally result in potential penalties or garnishments.

Read more:

Conclusion

In conclusion, gross income is a crucial financial figure. Either you are an individual or a business owner, it is necessary to be aware of gross income. We hope that today’s article has provided you with the foundation and practice of gross income.

We would love to hear and share more if you have any comments!

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