The concept of “gross income” can differ slightly in its composition and definition across countries, primarily because of differences in taxation structures, income reporting standards, and cultural variations in what is considered taxable income.
In essence, while the general idea of gross income—as the total income earned before any deductions or taxes—are somewhat universal, the specifics can vary based on a myriad of factors rooted in a country’s legal, economic, and cultural landscape.
For individuals, gross income signifies their earnings before any taxes or other deductions. This can include wages, interest, dividends, pensions, and rent.
For businesses, gross income, also termed as gross profit or margin, is the revenue minus the cost of goods sold (COGS).
Breaking down gross income
Individuals. Apart from wages, gross income encompasses pensions, interest, dividends, and rent. It’s the foundation for tax returns. After accounting for deductions and exemptions, the result is the adjusted gross income (AGI), which then helps calculate taxable income.
Businesses. Gross income is obtained by deducting COGS from total revenue. It gives a snapshot of a product’s performance and the company’s overall profitability. Typically, this figure appears on a company’s income statement.
Gross income vs net income
Gross income and net income are two fundamental financial terms that are often used in the context of individual earnings and business finances. While we explained what gross income is for individuals and businesses, here is a couple of words about net income.
Net income for individuals is the amount of money an individual takes home after all deductions have been accounted for. It’s often called “take-home pay” or “net pay.” This is the money an individual has available to spend, save, or invest.
Net income for businesses is the total profit remaining after all expenses have been deducted from the gross income. This includes operating expenses, interest, taxes, and other relevant costs. Net income gives a comprehensive view of a company’s profitability over a specified period.
In essence, while gross income provides an initial understanding of earning potential, net income offers a clearer picture of actual earnings (for individuals) or profitability (for businesses) after all expenses and deductions are considered.
Calculating gross income for individuals
For individuals, gross income encompasses all of their earnings before any deductions or expenses are subtracted.
- Wages and salaries. Begin with the total amount earned from work. This includes hourly wages, salaries, overtime, bonuses, and commissions. For those who receive regular paychecks, the gross income will often be listed as the total amount before taxes and other deductions.
- Self-employment and freelance income. For those who are self-employed or freelance, gross income is determined by taking the total revenue from goods sold or services provided and then subtracting any direct business expenses, like the cost of goods sold. It does not account for other business expenses like marketing, utilities, or rent.
- Rental income. If you earn money from renting out a property, add the total amount you receive from tenants. Don’t deduct expenses like mortgage interest or maintenance costs at this point.
- Dividends and interest. Include any dividends from stocks or interest from savings accounts, CDs, or other financial investments.
- Retirement distributions. Include any money taken out from retirement accounts, unless it’s a return of contributions from a Roth IRA, which is not taxable.
- Alimony and child support. If you receive alimony or child support, this may also be included, though the rules can vary depending on jurisdiction.
- Other income. Include any other sources of income, such as lottery winnings, gains from the sale of assets, or cash prizes.
Sum up all of the above components to arrive at your total gross income. After summing these, subtract tax deductions to get AGI. In the US, this total is typically reported on the W-2 or 1099 form.
Note that some incomes, like inheritance or social security benefits, aren’t taxable. What’s more, the specific components of gross income and whether certain types of income are taxable can vary based on the country’s tax laws and regulations where the individual resides.
Calculating gross income for businesses
Calculating gross income for a business is distinct from calculating it for individuals. For a business, gross income represents the total sales revenue minus the cost of goods sold (COGS). Here’s how you can determine it:
- Begin with the total revenue from all sales. This is the total amount of money brought in from selling products or services before any expenses are deducted.
- Determine the Cost of Goods Sold. COGS represents the direct costs associated with the production of the goods sold by a company. This includes raw materials, direct labor, and other direct costs but does not include indirect expenses such as sales, marketing, and distribution.
- For retailers or wholesalers, COGS includes the cost of inventory that was sold during the period. For manufacturers, it includes raw material costs, labor costs, and manufacturing overhead.
- COGS can be determined using the formula “COGS=Beginning Inventory+Purchases−Ending Inventory”
- Once you have both figures, subtract the COGS from the total sales revenue:
- Gross Income=Total Sales Revenue−COGS
The result is the gross income or gross profit. This number gives an idea of how efficiently a business is producing its goods. It doesn’t account for other operating expenses, taxes, or interest.
For example: If a company has total sales of $500,000 and COGS of $300,000, its gross income is $200,000.
Calculating monthly gross income
If you’re an individual, check your pay stub for pre-tax monthly earnings. For hourly workers, multiply the hourly rate by monthly hours. You can also divide the annual salary by 12. This method is relevant for employees, freelancers, and contractors. Remember to consider other earnings, like from investments or side jobs.
If you’re a business, use gross income = Gross revenue – COGS, focusing on monthly data.
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