What Is Gross Income

Dec 14, 2023 By Susan Kelly

For individuals, the term "gross income" is the total amount earned before taxes and other deductibles deducted. Earned income can be found in various forms, including salaries, bonuses, tips, hourly wage rental income, dividends from stocks, bonds, and savings interest on your account. In the less conventional but increasing "gig" economy, people can earn money from several time, temporary, or freelance jobs. The money earned from these positions would count as gross income. To avoid confusion, it's important to know a separate gross income standard for businesses. In the case of a business, gross income, or gross profit, is the amount of money earned from products less the cost of those items. The gross profit line item is within the profit and loss statement.

Gross Income for Individual

The gross income of one person is defined as the sum of income earned before tax deductions, or deductions are paid. A full-time employee counts the annual salary or wage before tax in their income gross. A full-time worker might also earn income from other sources that must be taken into consideration when calculating their earnings. For instance, any dividends earned on stocks owned by an individual must be included in their gross revenue. Other incomes include rent from rental properties and the interest earned from savings and investments.

Gross Income for a Business

Gross profit is a line element of a business's financial statements, which is the company's gross profit over the year after deducting all indirect costs, including interest, taxes, and other costs. It is the amount of money the company made by selling its products or services after deducting direct costs involved in the production of the products which are being sold. Direct costs may include labor and equipment utilized during the manufacturing process supplies, costs for supply, the cost of raw materials, and shipping and transportation costs. Taxes cannot be deducted as they aren't directly connected to the sale and production of the item.

Importance of Gross Income

Gross income is the basis for lenders when deciding the amount they'll allow a person to take out a loan, such as an auto loan or mortgage. The lender determines the amount they will lend based on an individual's debt-to-income ratio, also known as DTI. The DTI is calculated by dividing monthly payments by the monthly gross income. The higher the DTI is, the less likely it is that a lender will be inclined to lend money, and the greater the interest rate on loans will be. Ideally, DTI should be no more than 36 percent; however, some lenders loan as much as fifty percent DTI.

Gross Income as Compared to Net Income

Gross income refers to the sum of all your earnings. It's higher than your net income, which is your earnings after withheld deductions and taxes. Employers must withhold federal and state tax on income, Social Security taxes, and Medicare taxes. The net income of your net earnings is the one you'll be using to budget. It's your money to spend. If you're self-employed or an independent contractor, you'll be receiving a gross salary. You'll have to save cash for taxes by yourself because there's no one else to pay taxes for you. A tax professional can help you figure out how much you should save and also if you need to file estimated tax returns every quarter.

What Is Your Gross Monthly Income?

Monthly gross income is the sum of money that a company earns during the month through sales of a service or product less the cost of the goods needed to produce the product or service which was sold. The monthly gross income can also include additional sources of income for the month that are not salaries or wages, such as interest from business investment, income from investments, or retirement and pension earnings. Multiply your monthly gross earnings by 12 to calculate your annual gross income. If you make a salary for the year, then simply calculate your earnings every year, along with any other sources of income, and then divide it by 12 to determine your monthly gross income.

How Do I Determine Your Gross Earnings?

The gross income is the sum of money earned before tax and other tax deductions. A worker's pay will show the gross pay and take-home pay in most cases. If applicable, you'll be required to include additional sources of income you've earned--gross and not net.

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