Gross income simply refers to your total compensation before taxes or other deductions. If you consider yourself a business, your gross income is your primary income.
This can be useful to know for various reasons. For example, if you take out a loan, you will have to pay monthly. Loan approval usually depends on your gross income exceeding a certain amount. Your gross income will also help you budget and determine how much you will have to save for retirement.
It’s also a much simpler measure than your net income, which requires you to account for taxes and other deductions.
Some of the common deductions, separate from taxes, include:
- health insurance premiums
- Pension contributions
- Benefits for commuters
- Flexible spending account contributions
- Certain types of insurance (e.g. life, disability, supplemental)
Remember that gross income is your compensation before taxes and deductions, and your net income is the money you receive after taxes and deductions.
What to Include in Gross Income
Gross income is the sum of all money earned during a given period. This includes salary, bonuses, commissions, indirect and freelance income, or any other type of income. Depending on the context, this may also extend to income from dividend payments, interest and capital gains.
The only thing you won’t have to do in calculating your gross income is take taxes into account. Gross income is purely a pre-tax amount, so taxes will not be relevant to the calculation.
Gross income refers to your total income before taxes or other deductions, while net income is the money you earned after taxes and deductions.
The importance of knowing your gross monthly income
If you’re applying for a home or car loan, or trying to budget, it’s important — and necessary — to know how much you’re taking in each month. Most lenders will need to know how much you earn to determine if you will be a reliable borrower.
Knowing your gross monthly income can also help you decide how much to save for your retirement. If you’re trying to figure out how much to spend on your retirement account each month, knowing where you stand from a gross income perspective will help inform that decision.
Your net income is also of great importance. One way to think of net income is to think of it as the “disposable” money that is actually paid into your checking account or savings account each month. Net income is also useful for establishing a monthly budget since your regular after-tax expenses, both fixed and discretionary, will come from your net income.
Unfortunately, when you are quoted a salary of $75,000, you do not receive that amount in usable cash. A significant amount of money is spent on fixed taxes and deductions, so knowing your net income will help you develop a more stable budget and allow you to stay in control of your finances.
Calculation of gross monthly income if you receive an annual salary
If you are paid an annual salary, the calculation is quite easy. Again, gross income refers to the total amount you earn before taxes and other deductions, which is how an annual salary is usually expressed. Simply take the total amount of money (salary) you get paid for the year and divide it by 12.
For example, if you receive an annual salary of $75,000 per year, the formula indicates that your monthly gross income is $6,250.
Many people get paid twice a month, so knowing your biweekly gross income is also useful. To find this amount, simply divide your monthly gross income by 2.
Continuing with the example above, you would divide $6,250 by 2 to arrive at $3,125 as gross revenue every two weeks.
Calculate gross monthly income if you are paid hourly
For hourly employees, the calculation is a little more complicated. First, to find your annual salary, multiply your hourly wage by the number of hours you work each week, then multiply the total by 52. Now that you know your annual gross income, divide it by 12 to find the monthly amount.
Note: If your hours vary from week to week, use your best estimate of the average number of hours you work.
For example, if you are paid $15 per hour and work 40 hours per week, your weekly gross salary is $600. Multiplying this amount by 52 yields a gross annual income of $31,200. Finally, dividing by 12 gives a gross income of $2,600 per month.
If you have special circumstances, such as a certain number of overtime hours per month or a recurring bonus or commission, you can usually add it to your gross monthly income.
The common way to do this is to determine the amount of overtime pay (or bonus or commission) you received in the past year and divide it by 12. This amount would then be added to the gross monthly income that you calculated from your base. Pay.
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