What Does Gross Income Mean for Individuals and Businesses?

Gross income represents total earnings before taxes or deductions, encompassing wages, dividends, and rental income for individuals. For businesses, it reflects revenues minus the cost of goods sold (COGS), highlighting profitability from core operations.

By Brad Nakase, Attorney

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What is the meaning of gross income?

A person’s total earnings before taxes and other deductions are their gross income, or gross pay if it appears on a paycheck. This encompasses all forms of income, not just wages, and is not restricted to monetary gains; it also includes profits from the sale of goods and services.

The terms gross income, gross margin, and gross profit all mean the same thing to businesses. The income statement will show a company’s gross income, which is the total revenue less the cost of goods sold (COGS).

Important Points to Remember 

  • Earnings from wages and salaries, in addition to other sources of income such as pensions, dividends, interest, and rental income, are included in an individual’s gross, or total, income.
  • Simply said, gross income is the amount a company makes after deducting the cost of products sold from total revenues.
  • An individual’s gross income is included in their income tax return, and after taking into account a number of deductions and exemptions, it is transformed into adjusted gross income, which is then taxable income.
  • When applying for a loan, people may also have to provide their gross income.
  • To get a better feel for how well a product is doing for the company, many companies look at gross income rather than net income.

A Basic Overview of Gross Income

An individual’s and a business’s gross income are not the same thing. Finding one’s gross income is as simple as looking at one’s most recent pay stub or plugging in one’s hours worked and salary. On the other hand, it could take a little more math to figure out a company’s gross income.

Renters and lenders alike look at a person’s gross income to get a sense of their creditworthiness. To find out how much money you owe in federal and state income taxes, you start with your gross income and then subtract all of your deductions.

To learn about the performance of the product-related part of its business, a corporation computes gross income. A business can learn more about the factors that contribute to its success or failure by analyzing its gross income and excluding certain expenses. For instance, a business may not want its rent expense included in its performance metrics for a particular product line since it is an unrelated administrative expense.

Methods for Determining Gross Income

An individual’s method of calculating gross income differs slightly from a company’s method. Despite their similarities, the two types of entities employ distinct ways to categorize their income and expenses in their respective calculations.

Personal Gross Income

Individuals are required to record not just their earnings or salaries on their income tax return, but also other types of income, including as tips, rental payments, capital gains, alimony, dividends, interest, and pension. This is because the gross income measure takes into account all of these items. You get your adjusted gross income (AGI) after you take out all of your above-the-line tax deductions.

When determining gross income for creditors and lenders, some forms of income may be considered, even though they are not taxable to you. Certain forms of social security income, life insurance payouts, gifts, inheritances, and interest on state or municipal bonds are examples of common forms of income that are not subject to taxation.

In most cases, a person’s complete salary can be considered gross income for purposes other than paying taxes. Loan applications require proof of gross income, which is defined as an individual’s net income before deductions for taxes and living expenses. To ensure consistency in gross income calculations, certain lenders may insist on using AGI.

Gross Income for a Business

A company’s income statement may contain a line item for gross income. If the information is not displayed, it is computed by subtracting the cost of goods sold (COGS) from the gross revenue.

The term “gross margin” can describe both gross income and gross profit. Another measure of profitability is gross profit margin, which is more accurately expressed as a percentage. After deducting the direct expenses of production or provision from the total revenue, a business’s gross income shows how much money it has earned from its goods or services.

You may find a company’s gross income either by looking at the overall business or by looking at individual products. It is possible to determine the profit margin for each product in a business by utilizing a chart of accounts that breaks down income and expenses by product.

Gross income accounts for the direct costs of production or provision of goods and services but excludes indirect costs of selling, administration, taxes, and other overhead expenses.

Comparing Gross Income with Net Income

Companies frequently use the terms gross income and net income when describing their profit. You can also use either word to talk about how much money a family makes or brings home.

When it comes to an individual, the term “net income” refers to the entire amount of income that is left over after that person has paid for all of their personal expenses. The calculation of a person’s personal net income involves subtracting the total amount of personal expenses from the total amount of revenue generated.

Gross income, on the other hand, places restrictions on the amount of deductions that can be made from total revenue obtained. Although a person’s actual spending probably exceeds their paycheck deductions, the latter provides a useful illustration of how costs can cut into a person’s revenue, and the former is more indicative of their net income.

Net income is the difference between a company’s entire revenue and its total expenses. Similar to gross income, these costs comprise the cost of items supplied. Expenses that aren’t accounted for in gross income are likewise a part of net income, along with taxes, interest, and selling and general administrative costs. Net income takes into account all aspects of a company’s costs, whereas gross income presents a more elevated picture.

When comparing different types of businesses, it’s usually best to use gross income as a measure since it takes into account both revenue and the exact expenses that went into making that revenue. This allows you to see how effectively each company made money.

A Case Study of Personal Gross Income

Imagine a person whose yearly income is $75,000 plus interest on a savings account of $1,000, stock dividends of $500, and rental property income of $10,000. They earn $86,500 per year in gross income. Another way to look at it is that the person’s gross income is around $7,200 per month.

Consider the following monthly expenses: $1,500 for rent, $450 for student loans, and $300 for a car loan. When determining gross income for reasons other than taxes, all three of these items are not included. Earnings are the sole component of a person’s gross income.

So, for the purpose of this hypothetical federal income tax return, let’s say that this person incurred $500 in interest payments on their student loans over the previous year. Students can deduct the interest they’ve paid on their student loans from their adjusted gross income when they file their taxes. If the person’s income remains unchanged from the previous year, their AGI would be $86,000 ($86,500 – $500).

Gross Income Example for a Company

For the quarter ending in September 2023, Apple recorded total net sales of $89.5 billion in its consolidated statement of operations. The total cost of goods sold for the corporation was $42.59 billion, with an extra $6.49 billion going toward services. Apple recorded a gross income of $40.43 billion by excluding the total cost of goods sold from their net sales.

Apple spent $7.3 billion on R&D, $6.2 billion on S&G&A, and $4.04 billion on income taxes. Gross income does not include any of these three costs. Net sales less cost of goods sold are the only components that make up a business’s gross income.

How Do I Determine My Own Gross Income?

Earnings before deductions for taxes and other expenses make up an individual’s gross income. Both the gross and net wages of an employee are often detailed on their paycheck. You should also include any additional income you have earned, gross rather than net, if it applies.

What Is Gross Income Versus Net Income?

The term “net income” refers to the money that people actually keep after paying all expenses associated with their work. After deducting all expenses, it is the remaining revenue for businesses. Contrast this with gross income, which does not contain any expenses other than COGS.

How Is Gross Income for a Company Determined?

A business’s gross income is the amount of revenue it receives from sales minus the amount it spends on goods sold. A company’s gross income would be $400,000 if it sold $500,000 worth of products and spent $100,000 on their production.

What Is the Gross Income I Receive Each Month?

Determine your monthly earnings to get your personal gross income. You can expect this to differ from the amount you receive as payment from your company or the amount you take home.

The sum of money you made in a specific time period before deductions or taxes were subtracted is called your gross income, and it may be found on your pay stub. Your W2 or 1099 from the end of the year will also show your total gross income. Two more ways to figure out how much money you’ll make each month are (1) your take-home pay before taxes and (2) the total number of hours you’re scheduled to work in a specific month times your hourly wage.

Are Taxes Included in Gross Income?

A person’s or business’s gross income is their whole income before taxes and other deductions. The term “gross income” refers to the sum of money that comes in before deducting all of the interest, costs, and taxes.

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