Gross income can be referred to by a few different names — gross profit, gross pay, pre-tax income or before-tax income just to name a few — but don't let that confuse you. No matter what its called, gross income is an important number you need to know whether you want to evaluate a company or you're filing your taxes.
But what exactly does gross income mean and how do you calculate it?
What Is Gross Income?
Gross income is essentially the total amount you or a business earns over the course of certain period of time. It's usually measured over a year, but companies usually report their gross income on a quarterly basis.
Figuring out what income is counted when determining gross income can be tricky though, because the numbers that go in determining the figure are different for a company compared to an individual.
Knowing these differences can help you better understand what that figure tells you about a company and what needs to be included as sources of income for tax purposes.
Gross Income for a Business
Gross income for a company measures the revenue it makes from sales of the goods or services it offers minus the expenses the company used to manufacture or provide them.
Also called gross profit, the number can give you a cleaner and more complete picture about the basic financial performance of a company because it is a gauge of the company's profitability.
It might appear on the income statement of a company you're looking at, but because gross income is not a required item line that needs to be reported, some might leave it off. In these cases, there are the two figures to look for that will help you calculate gross income.
How to Calculate Gross Income
The equation for figuring what a company's gross income or gross profit: Sales revenue - costs of goods sold = gross income.
Sales revenue is the total amount of money a company generates from selling its goods or services in its main business with no other factors or deductions taken into account.Cost of goods sold are any costs associated with the manufacturing of the products that companies sell. These can be any costs related to raw materials used in the production of the good, supply costs, machinery that was purchased or labor expenses. These are the direct costs involved in the good or service companies provide consumers.
Gross Income for an Individual
An individual's gross income varies slightly from what gross income looks like for a company. Instead of revenue from a product or service and costs associated with producing them, an individual's gross income is the amount of money you earn from working before deductions are taken out, which in most cases comes in the form of taxes.
It's essentially your yearly salary pre-taxes, but for those who might not work a daily job, there are other sources that must be taken into account.
Other sources included in gross income would be any interest you earn from accounts, dividend payouts from investments, rental income, alimony, wages from secondary or freelance jobs, pensions, tips or selling your belongings online.
These are just a few examples of other income streams that might be counted toward gross income.
Gross Income vs. Net Income
The biggest difference between these two figures is that net income is the profit a company or individual makes after all expenses, taxes or any other deduction are taken out.
For an individual, net income would be the amount of take-home pay each pay period. For a company, it's a reflection of the profitability of the business.
The net income number can tell you a lot about where you stand financially. You can use it to figure out if you have enough money to cover your monthly expenses, for instance, 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 depiction of what your income looks like after certain itemized deductions are accounted for.
While filling out your tax return, you can calculate what your adjusted gross income will be. Figuring this number out will be important because it affects how much income tax you will pay. To ensure no mistakes when filling out the form, you can use tax software or seek help from a tax expert.
Some examples of the deductions you can take out include moving expenses, student loan interest deductions, alimony, educator expenses, IRA contributions and some health insurance deductions to name a few.
Knowing what your adjusted gross income is is crucial because it could affect the size of the refund check you get back from the federal government after you file your taxes.
Examples of Gross Income
It might be difficult to envision 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 company
If an auto manufacturer makes $2 million from selling its cars over the course of a year, but spends $1 million on vehicle parts to actually make the cars, the company's gross income is $1 million.
The company earned a total of $2 million from sales of its goods, but it cost them $1 million to manufacture them. This direct cost is taken out of that $2 million amount, leaving the company with its gross income of $1 million.
Example of gross income for an individual
If you make $100,000 at one job and a combined $75,000 from working a second job and selling some antique that had been collecting dust in your garage, your gross income for the year would be $175,000.
You derive that $175,000 number by adding up all the sources of income that you earn over the course of the year, so in this case that comes in the form of the $100,000 from your salary that your job pays you for work you did and the extra $75,000 that comes from the wages of your second job and the profit you made from selling your belongings.
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 company can make filling out your taxes a less stressful process.
In regards to what gross income looks like on this form, the total amount of money you earn from wages and salaries will appear in Box 1 of your W-2 document.
If you determine that the number seems a bit off after you did your own calculations based on how many hours you worked and what your pay was, don't be alarmed. Companies sometimes take out pretax deductions before reporting this number. These deductions include any contributions to employer-sponsored retirement accounts, medical premiums, spending 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.