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Gross Income: Definition, Formula & Example

Updated: November 23, 2022

The total of your earnings, or the total sum of money that you can receive from all of your sources combined, is known as your income.

Knowing this number is crucial because you must disclose your entire revenue to the government so you can pay the correct amount of tax and avoid any fines or penalties.

So what exactly is gross income? And why is it so important?

Read on as we take a closer look at all of this and more.

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    KEY TAKEAWAYS

    • Gross income is the total amount of money earned in a year from all sources before deductions.
    • The gross income formula is simply the sum of all these earnings.
    • Gross income is used to calculate taxes and other deductions.
    • It is important to know your gross income to make sound financial decisions.

    What Is Gross Income?

    Gross income is the total amount of money earned in a year before taxes or other deductions get taken out. For an individual, gross income is often called “salary” or “wages” earned from a job. It’s also possible to have other sources of income, like investments or rental property.

    In any business, gross income is the total capital gains that the business earns before any expenses get deducted. This includes things like Social Security.

    We will discuss this more in our guide below. So if you’re interested in learning more about gross income, please keep reading.

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    How Gross Income Works

    Gross income is the total revenue that a business earns before any expenses get deducted. Expenses can include things like rent, utilities, employee salaries, and other operating costs.

    As such, it is a good indicator of a business’s overall financial health, as it shows how much money the business is bringing in. You can use this to compare different businesses.

    Gross income is different from net income, which is the total revenue that a business earns after all expenses get deducted.

    You are responsible for paying federal income taxes once deducted from your earnings. If you paid enough in, you will receive a tax return.

    Your income after taxes and other withholdings is your net income. Your income statement shows you all adjustments to income. For instance, you’ll see your hourly wages, business income, and tax deductions. 

    If you have any savings account contributions, you will need to take those into account, too. If you’re self-employed, it’s crucial to keep track of your business expenses. Any job-related expenses could help you save on paying back the IRS.

    Your annual income seems bigger when you’re an independent contractor. But you also have to manage all of your income for tax purposes at tax time. 

    How to Calculate Gross Income

    The formula for calculating gross income is simple: 

    Gross Income Formula

    So let’s say that a business earned $100,000 in revenue and spent $50,000 on expenses. The gross income would be $100,000 – $50,000 = $50,000.

    It’s important to remember that net income differs from gross income. Net income is the total revenue that a business earns after all expenses get deducted. In our example above, the net income would be $50,000 – $0 = $50,000.

    Gross income includes all of the money that a business earns from selling products or services. This includes things like sales, interest, and dividends.

    Gross income does not include any expenses that the business incurred to earn that money. For example, if a business earned $100,000 in revenue and spent $50,000 on rent, the gross income would be $100,000 – $0 = $100,000.

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    Gross Income vs Net Income

    Gross income is not the same as net income. Net income is your gross income minus any taxes and other deductions. That means that your net income is what’s left after you’ve paid your federal and state income taxes, as well as Social Security and Medicare taxes.

    Gross income is what you earn before taxes, and other deductions are taken out. The easiest way to remember the biggest difference between gross income and net income is simple. Taxes aren’t deducted from gross income.

    Example of How to Calculate Gross Income

    Let’s say that you own a small business and you had the following income and expenses for the year:

    Income: $100,000

    Expenses: $50,000

    Rent: $10,000

    Utilities: $5,000

    Employee salaries: $20,000

    To calculate your gross income, you would simply subtract your expenses from your income. In this example, that would give you a gross income of $40,000.

    $100,000 – $50,000 = $40,000

    Your net income would be your gross income minus your expenses. In this example, that would give you a net income of $30,000.

    $40,000 – $10,000 – $5,000 – $20,000 = $30,000

    As you can see, your net income is less than your gross income because you have to subtract your expenses from your gross income to get your net income.

    Let’s look at another example.

    Income: $100,000

    Expenses: $70,000

    Rent: $10,000

    Utilities: $5,000

    Employee salaries: $20,000

    Advertising: $15,000

    In this example, the gross income would still be $30,000.

    $100,000 – $70,000 = $30,000

    However, the net income would be less than the gross income because there are more expenses in this example. The net income in this example would be $5,000.

    $30,000 – $10,000 – $5,000 – $20,000 – $15,000 = $5,000

    As you can see, the net income is lower than the gross income in this example because there are more expenses.

    Summary

    As you know, income can be either earned or unearned. Gross income is defined as all the money that you earn in a year from all sources, before any deductions are taken out. This includes wages, salaries, tips, interest, dividends, and capital gains.

    Knowing how to calculate your gross income is important for two reasons. First, it’s the starting point for figuring out how much tax you owe. Second, it’s often used as an eligibility requirement for loans, financial aid, and other programs.

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    FAQs About Gross Income

    What’s adjusted gross income?

    Adjusted gross income (AGI) is a measure of income that includes all forms of income, but excludes certain deductions. The AGI calculates how much income tax a person owes.

    Where do I find my gross income?

    Your gross income is on your pay stub or your tax return. If you are self-employed, your gross income equals total money you earned from your business before any expenses get deducted.

    Is Box 1 on W-2 gross or net?

    Box 1 on a W-2 form is your gross income. This is the total amount of money you earned during the year before any taxes or deductions get taken out.

    What doesn't gross income include?

    Gross income doesn’t include money that you do not receive, such as discounts or subsidies. Additionally, gross income does not consider deductions for taxes, retirement, or other expenses.

    What is the rule of gross income?

    Basically, gross income is all income. It doesn’t have to be solely money. It can be barters, services, or anything else of value that you receive. However, there are a few exclusions to this rule.

    For instance, life insurance proceeds and gifts are not considered taxable gross income. Suppose you receive property in a trade or business transaction. 

    The value of the property is not included in gross income (but any cash you receive as part of the deal is taxable gross income).

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