Definition of gross income: formula and examples

By Dean P. Green Last updated Oct 4, 2021

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What is gross income?

An individual’s gross income – also called gross wages when on a paycheck – is the individual’s total salary from their employer before taxes or other deductions. This includes income from all sources and is not limited to income received in cash; it also includes goods or services received. Gross annual income is the amount of money a person earns in a year before taxes and includes income from all sources.

For businesses, gross income is interchangeable with gross margin or gross margin. The gross income of a business, shown on the income statement, is the income from all sources less the cost of goods sold (COGS) of the business.

Key points to remember

An individual’s gross income consists of income from wages and salaries as well as other forms of income, including pensions, interest, dividends and rental income.
The gross income of a business, also known as gross profit or gross margin, includes the gross income of the business minus the cost of goods sold, but it does not include all other costs associated with operating the business. .
Individual gross income is part of an income tax return and, after certain deductions and exemptions, becomes adjusted gross income and then taxable income.

Understanding gross income

Individual gross income

An individual’s gross income is used by lenders or landlords to determine whether that individual is a worthy borrower or tenant. When filing for federal and state income tax, gross income is the starting point before subtracting deductions to determine the amount of tax owed.

For individuals, the measure of gross income used in the tax return includes not only wages or salaries, but also other forms of income, such as tips, capital gains, rents, dividends, pensions. alimony, pensions and interest. After subtracting the tax deductions above the line, the result is Adjusted Gross Income (AGI).

By continuing the tax form, deductions below the line are taken from the AGI and result in taxable income. After application of authorized deductions or exemptions, the resulting taxable income may be significantly lower than an individual’s gross income.

There are sources of income that are not included in gross income for tax purposes, but can still be included in the calculation of gross income of a lender or creditor. Common sources of tax-free income are certain social security benefits, life insurance payments, certain inheritances or gifts, and state or municipal bond interest.

Gross business income

A company’s gross income, or gross profit margin, is the simplest measure of a company’s profitability. Although the measure of gross income includes the direct cost of producing or providing goods and services, it does not include other costs related to sales activities, administration, taxes and other costs related to sales. management of the whole company.

Example of individual gross income

Suppose an individual has an annual salary of $ 75,000, earns $ 1,000 in interest per year from a savings account, receives $ 500 per year in stock dividends, and receives $ 10,000 per year from rental income. Their gross annual income is $ 86,500.

Example of gross business income

Gross income is an item that is sometimes included in a company’s income statement but is not mandatory. If not displayed, it is calculated as gross income minus COGS.

begin {aligned} & text {Gross revenue} = text {Gross revenue} – text {COGS} & textbf {where:} & text {COGS} = text {Cost of goods sold } end {aligned}

$Gross revenue = Gross revenue - COGS or: COGS = Cost of goods sold$

Gross income is sometimes referred to as gross margin. Then there is the gross profit margin, which is more correctly defined as a percentage and is used as a measure of profitability. The gross income of a business reveals how much money it made on its products or services after subtracting the direct costs of producing the product or providing the service.

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