GROSS INCOME: Meaning, Formula & Difference

Gross Income
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Do you recall the excitement you feel when you got your first paycheck? It’s possible you were upset to learn that your net pay was significantly lower than you’d hoped. It was then that you likely came across the concept of gross income and wonder what it means in relation to net income and, later, other sorts of “income.” But, in order to properly budget and plan for the future of a small business, owners need to have a firm grasp on the difference between net and gross income. Managers can’t figure out if they need to boost sales or decrease expenses to increase profits if they can’t tell the difference between net and gross. This article explains the gross income example, adjusted gross income, and the formula to calculate it.

What is Gross Income?

Gross income is the amount of money that is generated on a paycheck before taxes and other deductions are made. It includes all earnings from all sources, such as salaries, rental revenue, interest income, and dividends. For instance, if a person receives $300,000 in compensation for providing consulting services, that sum represents the person’s total earnings.

When creating financial statements for firms, the term “gross income” (sometimes known as “gross profit”) refers to the revenue from sales of goods or services less the cost of things sold.

The sources of income could be profits from the sale of goods and services, royalties from the use of intellectual property, rent from real estate, capital gains from investments, etc. In addition, the profit and loss statement has a line item for gross profit.

Grasping the Concept

When comparing an individual’s finances to those of a firm, there are distinct differences between the components that make up total earnings. If an individual looks at their most recent pay stub or does the calculation themselves using their hours worked and wage, it will not be difficult for them to establish their total earnings. Alternately, the calculation of a company’s total earnings can require a little bit more effort.

Lenders and landlords look at an individual’s total annual income to decide whether or not they should consider that person a creditworthy borrower or tenant. It is customary to begin the process of calculating the amount of income tax that must be paid by beginning with the “gross” income before proceeding to deduct expenses and other items.

A company will figure out its total earnings to see how well the product-specific part of its business is doing. A corporation is able to better examine what is driving its success or failure when it considers only total earnings and restricts the kinds of expenses that are included in the analysis. If a firm wants to know how well a certain product line is selling, for instance, it does not want to have the rent expense of the company included in the performance because rent is an unrelated administrative expense. Instead, the company wants to know how well the product line is selling.

Gross Income Formula 

Personal and corporate net worth is measured by gross income. It is the amount of money an individual receives from all sources before taxes and deductions are taken out. It is the total amount of money coming in from any and all sources, such as rent, dividends, interest, etc., or, in the case of a business, the amount of money made by selling products or providing services minus the amount of money spent on production.

The formula for calculating gross income is as follows: 

For companies, gross income – more often reported as “Gross Profit” – is calculated by subtracting the cost of goods sold (COGS) from its revenue for the year.

Gross Income=Total Revenue-Cost of Goods Sold

  • Cost of Goods Sold: The cost of goods sold (COGS) includes things like raw materials and direct labor, both of which are essential to the production of revenue.
  • Revenue: The cash inflow a business experiences as a result of selling its wares.

Generally speaking, a company’s gross profit and gross margin will improve if its cost of goods sold (COGS) is reduced.

How Do I Calculate My Gross Income?

Individuals and corporations use slightly different methods to calculate it. Both types of organizations arrive at comparable results, but they do it by differentiating their sources of cash flow.

#1. Individual

When calculating an individual’s taxable income, this figure takes into account not just their salary or wage but also additional sources of income, including tips, capital gains, rent, dividends, alimony, pensions, interest, and even tips from their employer. Adjusted gross income is the amount of income left over after all tax withholdings have been deducted.

Even though the Internal Revenue Service does not consider certain forms of income to be taxable, a creditor or lender may still treat them as such. Certain retirement payments from Social Security and life insurance, certain bequests and gifts, and interest on state or municipal bonds are examples of nontaxable income.

In most cases, a person’s total pay can be counted as gross income for purposes other than taxes. Your total earnings for loan purposes are your annual income before deductions like taxes and living expenses. To create uniformity in the calculation of gross income, some lenders may insist on the use of Adjusted Gross Income.

#2. Business

An organization’s total earnings is a metric that may be reported on its income statement. If there isn’t a specific sign, it is found by taking the cost of goods sold out of the total income.

Gross margin is another name for it. In the same way, the gross profit margin is a percentage used to measure the financial health of a company. After deducting the direct costs to create the product or perform the service, it shows how much money it has made on the product or service.

Gross profit for a business can be tallied across the board or by product line. Assuming you have a good chart of accounts that sorts income and expenses into different categories, you can figure out the profit margin for each product.

What Are the Steps for Calculating Gross Income?

Follow these procedures to perform the computation for an individual: Sum of income from all sources earned by an individual

  1. Track down all the money you can, including your paycheck, dividends, rent, and any other sources.
  2. Add up all the money you earned in the first place: Total Earnings = Monthly Wage + Security Deposit + Dividends + Interest + Any Additional Money Received

Company Gross Profit Formula = Revenue- Expenses. The steps to determine it for a company are:

  1. Try to estimate the company’s overall earnings.
  2. Figure out the company’s cost of goods sold.
  3. Calculate using the formula: Gross Income = Total Revenue – Cost of Goods Sold

Why Is It Called Gross Income?

It is called “gross income” because it is the earnings of an individual or a company without any deduction. However, the total earnings of a person with a full-time job are their annual salary or compensation before deductions. A full-time worker’s income must take into account not only their salary from their day job but also any bonuses or side gigs that bring in extra cash.

Gross Income Example 

  • Let’s give a practical example of an individual total earnings:

Let’s say Paul does consulting work in the field of financial management and makes $100,000 per year. Paul receives $70,000 in rental revenue from his residences, $10,000 in dividends from the shares he owns at Company XYZ, and $5,000 in interest from his savings account. Here is how Paul’s money breaks down:

Gross Income = 100,000 + 70,000 + 10,000 + 5,000 = $185,000

  • Gross income example for a company

To illustrate, let’s pretend that XYZ, a paint manufacturing company, has $1,300,000 in gross revenue and the following expenses:

  • Market rates total: $60,000
  • Price of raw material: $150,000
  • Cost of equipment: $340,000
  • Labor costs: $150,000
  • Packaging and shipping: $100,000

Here is how we figure out the gross profit:

Gross Income = (1,300,000) – (150,000 + 60,000 + 340,000 + 150,000 + 100,000)

 = (1,300,000) – (800,000) = $500,000

Net vs Gross Income

“Gross” means the total amount, while “net” means the amount that is left over after a deduction. After deducting operating costs, fixed costs, taxes, and interest, a company’s net income is the amount left over. “Gross weight,” like “net weight,” refers to the total weight of the product and its packaging. “Net weight,” on the other hand, refers to the weight of the product itself. Here is the main difference:

Gross Income Net Income
MeaningGross means the total amount earned before any deductions or taxes are applied. It might mean either the total amount made or the total amount sold.When all expenses have been deducted, the remaining sum is the “net.” No additional deductions are made after the net value has been determined. No reduction in net worth is permitted.
ProfitGross profit (also known as gross margin, sales profit, or credit sales) is the amount of money left over after all expenses related to producing a good or rendering a service have been deducted.After deducting all expenses, the remaining amount is the net profit (also known as the top line, net income, or net earnings). In a contrast to gross profit, operating profit accounts for all business expenses.
WeightGross weight includes both the product itself and its packaging.When discussing weight, “net” indicates the true weight of the item (without the packaging).
IncomeBefore deducting the price of products sold from total revenue, we arrive at the gross profit.Selling, general, and administrative costs, interest payments, and tax payments are all subtracted from gross income to determine net income.

Adjusted Gross Income 

The term “Adjusted Gross Income” (AGI) refers to a person’s income after subtracting certain deductions and credits. However, you can count your salary, dividends, capital gains, business profits, retirement payouts, and whatever else you earn as part of your gross income. Expenses and payments for teachers, interest on student loans, alimony, and retirement savings all qualify as “adjustments to income.” Your adjusted gross income (AGI) is not allowed to be higher than your gross income (GTI) on your tax return, and in some years it may even be lower.

Furthermore, the term “above-the-line deductions” refers to the expenses and credits that are taken out of a person’s gross income before taxes are calculated.

Gross income is adjusted once the proper amount is subtracted, usually with the help of a professional accountant (AGI).

The tax liability, however, is calculated not from the raw gross amount but from the amount after adjustments have been made. Instead, taxable income is calculated by subtracting either the standard deduction or the taxpayer’s actual deductions from the taxpayer’s adjusted gross income (AGI) for the year.

Modified Adjusted Gross Income

Understanding your Modified Adjusted Gross Income (MAGI) is also crucial. The following are calculated based on your MAGI:

  1. When it comes to taxes, regular IRA contributions may or may not be deductible
  2. How you can qualify for the premium tax credit
  3. The eligibility for Roth IRA contributions

The Modified Adjusted Gross Income formula is obtained by adding back the following items from the AGI calculation:

  1. Rent payments and other unearned gains/losses
  2. Excluded foreign income
  3. Tuition or interest on student loans
  4. Exemptions from certain taxes (homestead, disability, senior, or veteran)
  5. Investments in a pension plan and in Social Security

Your adjusted gross income (AGI) and MAGI will likely be very close to one another. You can always put money into a regular IRA, but if your MAGI is too high, the deduction won’t help you.

Furthermore, the premium tax credit is available to those whose MAGI is between 100% and 400% of the federal poverty level. Finding your MAGI can increase your refund in the same way that an AGI does.

Why Your Gross Income Is Important

A person’s gross income is relevant for a variety of reasons that may be of importance to them, such as:

  1. Taxes: When calculating your tax liability to the IRS or a state agency, your total earnings is a key factor.
  2. Loan Qualification: When considering whether or not to grant an installment loan, a lender would typically look at your monthly gross income to ensure you are able to repay the loan.
  3. House Renting: When assessing a tenant’s ability to pay rent on time, landlords frequently look at the person’s gross income.
  4. Negotiating of Salary: Your present gross income can serve as a starting point when negotiating for a higher gross salary.


In case you weren’t aware, there are two types of money coming in: earned and unearned. The term “gross income” refers to an individual’s total annual earnings before taxes and other deductions are taken out. Wages, salaries, tips, interest, dividends, and gains on investments and capital are all considered income.

The ability to determine your gross income is useful for two reasons. For one, it’s the first step in computing your tax liability. Second, it is frequently a prerequisite for receiving grants, scholarships, and other forms of financial assistance.


Where does gross income come from?

The labor market is not the only potential source of gross revenue. You can count interest, dividends, rent, gaming winnings, inheritance, and other forms of interest and dividends as part of your gross income.

What’s included in gross income?

Once taxes and other deductions have been made, what remains is your “gross income.” You should never let your AGI (after adjusting for tax deductions) surpass your gross income.

What are the 3 types of income?

  • Active Income
  • Portfolio Income
  • Passive Income

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