Business, Politics, & Society

What Is Gross Income? Learn About Gross Income and the Difference Between Gross Income and Net Income

Written by MasterClass

Aug 31, 2019 • 3 min read

When discussing the amount of money earned by a business or an individual, accountants typically consider two metrics. The first is the amount of money that the business or individual receives from sales, wages, gifts, credits, and other forms of income. The second is the expenses that the individual or business may incur. When we exclusively consider the individual’s or business’s incoming funds, we refer to gross income.

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What Is Gross Income?

Gross income is the total amount of money that comes into a business during a fixed period of time—without consideration for the various expenses that businesses might incur during that same period of time.

What Are Some Examples of Gross Income?

Gross income is the sum total of every way that a business receives money. Sources of this money include:

  • Monies received for physical goods
  • Monies received for services
  • Rental income
  • Investment dividends
  • Tax credits

When you add up all these sub-categories, along with any other form of incoming cash, you have the total gross income for that company.

What Is Individual Gross Income?

The phrase “individual gross income” is often used by tax professionals when determining a person’s liabilities to federal, state, and local governments.

Just like businesses, individual people also have a gross income from the sources listed above. Typically, individuals receive most of their gross income in the form of a salary from an employer. Gross income can also come from life insurance payouts, prize winnings, and alimony payments.

For example, let’s say that an individual received the following allocations of money in a calendar year:

  • $45,000 in annual salary
  • $2,600 in dividends from the stock market
  • $1,500 in a tax credit for purchasing an electric vehicle
  • $500 in lottery winnings
  • $250 in supplemental monthly income driving for Lyft

Therefore, this individual’s total gross income would be $49,850.

What Is the Difference Between Gross Income and Net Income?

Net income refers to an individual’s or business’s income after all expenses have been paid. As such, net income will invariably be a lower number than gross income for that same person or business.

When it comes to taxes paid in the United States (whether to the IRS or state agencies), taxable income tends to be based on some form of net income, rather than gross intake that doesn’t account for expenses. This can affect the amount owed in capital gains taxes, social security taxes, and more.

Factors that can make one’s net income lower than one’s gross income include:

  • Cost of living expenses
  • Contributions to a retirement plan (such as an IRA)
  • Health insurance premiums
  • Payments on student loan interest
  • Upkeep of rental property

Such expenses are documented on an income tax return form and will affect what the government considers to be a person’s or business’s total taxable income for the year.

Note, however, that not all forms of savings and investment will count as an income tax deduction. For instance, if you put money into retirement accounts (like an IRA or 401k), your taxable income decreases. But if you simply keep the money in a savings account, this will have no effect on what the federal government calls your adjusted gross income (or AGI).

Businesses have their own unique factors that may lower their net income. If the cost of goods goes up in a particular industry, certain businesses may see reductions in their net income. Likewise, if a business opts to pay a higher hourly wage to its employees, its net income may decrease. Gross income is only one component to a company’s full financial picture, and in many cases net income offers a more honest assessment of the business’s fiscal health.

Whether you’re just starting out in business or have your ambitions set on a higher rung in the corporate ladder, understanding economics, and business strategy is paramount to success. Learning to think like an economist takes time and practice. For Nobel Prize-winner Paul Krugman, economics is not a set of answers—it’s a way of understanding the world. In Paul Krugman’s MasterClass on economics, he talks about the principles that shape political and social issues, including access to health care, the tax debate, globalization, and political polarization.

Want to become a better business leader? The MasterClass All-Access Pass provides exclusive video lessons from master economists and strategists, like Paul Krugman.

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