Gross Income – Calculation and Explanation

Your gross income is used as the starting point for determining your taxable income, as well as your ability to pay rent and pay back loans.  It’s calculated by adding together all of your income sources.  Gross income is used to calculate net income, adjusted gross income, and modified adjusted gross income.

What Is Gross Income?

What Is Gross Income? 

For individuals, gross income is all the money you earn before taxes and other deductions are subtracted. Your earned income can come in many forms: salary, bonuses, tips, hourly wages, rental income, dividends from stocks and bonds, and savings account interest. In the less traditional but growing “gig” economy, people can earn income from multiple part-time, temporary, or freelance positions. All the monies earned from these jobs would count toward your gross income.

 
To avoid confusion, it’s worth knowing that there’s a different gross income definitions for businesses. For a business, gross income, also known as gross profit, is the revenue earned from goods minus the cost of those goods. Gross profit is a line item in a profit and loss statement.

How gross income works

This income typically comes from a paycheck, which can comprise a combination of hourly wages, salary, commission, and bonuses. But gross income can come from other sources such as annuities, alimony, pension, capital gains, rental income, royalties, and income from self-employment. These forms of income are often only partly subject to taxation. Other sources of gross income subject to taxation are:

  • Alternative compensation for services rendered
  • Business income
  • Dividends
  • Gambling winnings
  • Gas, oil, or mineral rights
  • Income from discharged debt
  • Income from a decedent or as an interest of an estate or trust
  • Interest from bank accounts, certificates of deposit (CDs), etc.
  • Selling goods online or in-person
  • Tips

Some examples of nontaxable income include inheritance, municipal or state bonds, workers’ compensation payments, and life insurance proceeds.

How to Calculate Gross Income

Gross Income for a Business

Gross profit is an item in the income statement of a business, and it is the company’s gross margin for the year before deducting any indirect expenses, interest, and taxes. It represents the revenue that a company earned from selling its goods or services after subtracting the direct costs incurred in producing the goods being sold.

Direct costs can include expenses such as labor costs, equipment used in the production process, supply costs, cost of raw materials, and shipping costs. Taxes are not deducted since they are not directly related to the production and sale of the product.

The formula for calculating the gross incom, or gross profit, of a business, is as follows:

Gross Income = Gross Revenue – Cost of Goods Sold

Individual gross income

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

For individuals, the gross income metric used on the income tax return includes not just wages or salary but also other forms of income, such as tips, capital gains, rental payments, dividends, alimony, pension, and interest. After subtracting above-the-line tax deductions, the result is adjusted gross income (AGI).

Continuing down the tax form, below-the-line deductions are taken from AGI and result in a taxable income figure. After applying for any allowed deductions or exemptions, the resulting taxable income can be significantly less than an individual’s income.

How gross income works

What is income

Individuals, corporations, members of partnerships, estates, trusts, and their beneficiaries (“taxpayers”) are subject to income tax in the United States. The amount on which tax is computed, taxable income, equals gross income less allowable tax deductions.

Gross income is not limited to cash received. “It includes income realized in any form, whether money, property, or services.”

Following are some of the things that are included in income:

  • Wages, fees for services, tips, and similar income. It is well established that income from personal services must be included in the gross income of the person who performs the services. Mere assignment of the income does not shift the liability for the tax.
  • Interest received, as well as imputed interest on below market and gift loans.
  • Dividends, including capital gain distributions, from corporations.
  • Gross profit from the sale of inventory. The sales price, net of discounts, and less cost of goods sold is included in the income.
  • Gains on the disposition of other property. Gain is measured as the excess of proceeds over the taxpayer’s adjusted basis in the property. Losses from the property may be allowed as tax deductions.
  • Rents and royalties from the use of tangible or intangible property. The full amount of rent or royalty is included in the income, and expenses incurred to produce this income may be allowed as tax deductions.
  • Alimony and separate maintenance payments.
  • Pensions, annuities, and income from life insurance or endowment contracts.
  • Distributive share of partnership income or pro-rata share of income of an S corporation.
  • State and local income tax refunds, to the extent, previously deducted. Note that these are generally excluded from gross income for state and local income tax purposes.
  • Any other income from whatever source. Even income from crimes is taxable and must be reported, as failure to do so is a crime in itself.

Gifts and inheritances are not considered income to the recipient under U.S. law. However, gift or estate tax may be imposed on the donor or the estate of the decedent.

How to Calculate Gross Income

What Is Net Income?

Your net income is calculated by subtracting taxes and other deductions, such as retirement account payments, health insurance payments, and loan payments, from gross income. Those deductions are the reason for that surprise when you looked at your first paycheck – it was for your net, not gross, income. Net income is similar for businesses, which calculate net income by subtracting taxes, operating expenses, depreciation, and other costs from sales revenue.

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