Gross Earnings: Definition, Examples, Vs. Net Earnings

What Are Gross Earnings?

Gross earnings is the total amount of income earned over a period of time by an individual/household or a company. For individuals and households, gross earnings are the income earned before the deduction of taxes or adjustments. In the corporate world, it's an accounting convention that refers to a public company's gross profit or the amount left from total revenues over a specified time period once the cost of goods sold (COGS) is deducted.

Key Takeaways

  • Gross earnings is the total amount of income earned over a period of time by an individual/household or a company.
  • The gross earnings for a person or household are any income without any deductions.
  • For a business, gross earnings are the total revenue less the cost of goods sold.
  • Gross earnings are also referred to as gross income or gross profit.
  • The IRS differentiates between gross earnings and adjusted gross income, which is what is left over when certain above-the-line deductions are subtracted.

Understanding Gross Earnings

Gross earnings are also commonly referred to in the financial sector as gross profit or gross income. As noted above, the term has different meanings depending on how it is used.

When referring to personal or household income, gross earnings are generally the first line of an employee's pay stub. This is followed by income and payroll taxes and other deductions, such as employer-sponsored health insurance, life insurance, and retirement benefits. Once these deductions are accounted for, the employer lists the employee's net earnings or income on the bottom of the paystub and on their paycheck.

Things work a little differently for businesses. When it comes to the business world, the term refers to the amount of money left from a public company's total revenue once the COGS is deducted. Also referred to as gross profit, it is the income a company earns before any adjustments and other deductions, such as taxes. These other costs, such as administrative expenses, are not included and fall under a company's operating income.

Most lenders generally look at your gross income when they decide how much credit they should extend to you.

Gross Earnings on Business Income Statements

A company's gross earnings are reported periodically on its income statement. The first line of the income statement reports a company's total sales and revenues for a given time period, while the COGS and gross earnings often appear on the second and third lines of many income statements. The difference between revenue and COGS is a company's gross earnings.

The COGS includes costs directly related to the company's product, such as:

Once a business calculates its gross earnings, it may subtract the rest of its business expenses, including costs such as utilities, loan repayments, office supplies, contractor fees, and many other expenses.

Indirect costs are not included in a company's cost of goods sold.

Gross Earnings vs. Adjusted Gross Income (AGI)

For tax purposes, the Internal Revenue Service (IRS) distinguishes gross earnings and adjusted gross income (AGI). Gross income includes all of the money you earn through the year including wages, income from a business, alimony payments, rental income, interest, and a few other types of payments.

The IRS allows taxpayers to take a select number of above-the-line deductions from gross income, and these include certain expenses incurred by educators, eligible moving expenses, contributions to IRA accounts as well as a few others. The difference between your gross income and these deductions is your AGI.

When you complete your income tax return, you subtract a standard deduction or a list of itemized deductions from your AGI, and the difference yields your taxable income, the amount upon which the IRS levies an income tax.

Examples of Gross Earnings

To understand individual gross earnings, consider Mr. Z, who earned a total of $50,000 for the recently completed fiscal year. He also paid $10,000 in income tax, retirement contributions, and Social Security payments. In this case, his gross earnings are $50,000, and his net earnings are $40,000.

But how does it work for businesses? Here's a simple example. Let's say Company X has sales of $2 million, cost of goods sold of $500,000, and expenses related to the sale of $300,000. The company's gross income is $1.5 million. After the other deductions, it is left with $1.2 million in net income.

Article Sources
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