What is gross income? Definition and how to calculate
Gross income can be referred to by a few different names – gross profit, gross salary, pre-tax income, or pre-tax income to name a few – but don’t let that confuse you. Whatever its name, gross income is an important number that you need to know if you want to value a business or file your taxes.
But what exactly does gross income mean and how do you calculate it?
What is gross income?
Gross income is basically the total amount that you or a business earn over a certain period of time. It is typically measured over a year, but businesses typically report their gross income on a quarterly basis.
Figuring out what income is counted when determining gross income can be tricky because the numbers that go into determining the number are different for a business compared to an individual.
Knowing these differences can help you better understand what this number tells you about a business and what should be included as a source of income for tax purposes.
Gross business income
A business’s gross income measures the revenue it earns from the sale of the goods or services it offers less the expenses the business used to manufacture or provide them.
Also called gross profit, the number can give you a clearer and more complete picture of a company’s basic financial performance because it is an indicator of how profitable the business is.
It may show up on the income statement of a business you are reviewing, but since gross income is not a required item line that must be reported, some may leave it out. In these cases, there are the two digits to look for that will help you calculate gross income.
How to calculate gross income
The equation for determining what is the gross income or gross profit of a business: Revenue – cost of goods sold = gross revenue.
Turnover is the total amount of money a business generates by selling its goods or services as part of its core business, without any other factors or deductions taken into account.
Cost of goods sold
are the costs associated with manufacturing the products that companies sell. These can be all costs related to raw materials used in the production of the good, procurement costs, machinery purchased, or labor expenses. These are the direct costs involved in the good or service that businesses provide to consumers.
Gross income for an individual
The gross income of an individual differs slightly from the gross income of a business. Instead of the income from a product or service and the costs associated with its production, an individual’s gross income is the amount of money you earn by working before deductions, which in most cases are present in the form of taxes.
This is basically your pre-tax annual salary, but for those who might not be working daily, there are other sources that should be considered.
Other sources included in gross income would be interest you earn on your accounts, dividend payments from investments, rental income, alimony, wages from secondary or self-employed jobs, pensions, tips or selling your goods online.
These are just a few examples of other sources of income that could be counted in gross income.
Gross income versus net income
The biggest difference between these two numbers is that net income is the profit that a business or individual makes after deducting any expenses, taxes, or any other deduction.
For an individual, net income would be the amount of net pay in each pay period. For a business, it is a reflection of the profitability of the business.
The net income figure can tell you a lot about your financial situation. You can use it to determine if you have enough money to cover your monthly expenses, for example, or see if you can afford to start saving.
What is adjusted gross income?
Also known as AGI, Adjusted Gross Income can be a more accurate representation of what your income looks like after certain itemized deductions are posted.
By completing your tax return, you can calculate what your adjusted gross income will be. It will be important to determine this number as it affects the amount of income tax you will pay. To avoid mistakes when filling out the form, you can use tax software or seek help from a tax expert.
Some examples of deductions you can take out include moving expenses, interest deductions on student loans, child support, educator expenses, IRA contributions, and some health insurance deductions for no. to name a few.
Knowing your adjusted gross income is crucial, as it could affect the amount of the refund check you will receive from the federal government after you file your taxes.
Examples of gross income
It can be hard to imagine what gross income looks like in a real world situation, but these examples can make it easier to visualize.
Example of gross income for a business
If an automaker makes $ 2 million selling their cars in a year, but spends $ 1 million on parts to make the cars, the gross revenue of the business is $ 1 million.
The company earned a total of $ 2 million from the sale of its products, but it cost them $ 1 million to manufacture them. This direct cost is taken out of that $ 2 million, leaving the company with gross revenue of $ 1 million.
Example of gross income for an individual
If you made $ 100,000 with a job and $ 75,000 combined working a second job and selling antiques that had gathered dust in your garage, your gross income for the year would be $ 175,000.
You get that figure of $ 175,000 by adding up all the sources of income you earn during the year. $ 75,000 from the salary from your second job and the profit you made from selling your goods.
How to read gross income on your tax form
Being able to understand what each box means on your W-2 statement that you receive from your business can make the process of filing your taxes less stressful.
As to what gross income looks like on this form, the total amount of money you earn on wages and salaries will appear in box 1 of your W-2 document.
If you determine that the number looks a bit wrong after doing your own calculations based on the number of hours worked and your salary, don’t worry. Companies sometimes take pre-tax deductions before reporting this number. These deductions include all contributions to employer-sponsored retirement accounts, medical premiums, expense accounts or sometimes parking, among other measures.
If you want to know what your total gross pay was before any type of deduction, your last pay stub for the year will have this number on it.