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What is 'Gross Income'

Gross income, or gross pay, is an individual's total pay before accounting for taxes or other deductions. At the company level, it's the company's revenue minus the cost of good sold. In this case it is also referred to as gross profit and, when expressed as a percentage of revenue, gross margin

BREAKING DOWN 'Gross Income'

Calculating Gross Pay

For Individuals

Gross income is an individual's income and receipts from nearly all sources. It is the starting point for determining the taxes that individual will pay. Sources of gross income or pay include salary, wages, tips, capital gains, dividends, interest, rents, pensions and alimony. Even income from illegal activities is included: in 1961 the Supreme Court ruled in James v. United States that failure to report income from criminal activities to tax authorities is itself a crime.

Some sources of income are excluded from gross income. These include some interest on municipal and state bonds, some Social Security benefits, certain gifts and inheritances, some retirement plan contributions, life insurance payouts and some income from the sale of a home. Unless there is a specific exemption, however, any income is considered gross income.

For Businesses

For a business, gross income has a slightly different meaning. Often it will appear on a public company's income statement as either "gross income" or "gross profit." If it is not present, it can be calculated by subtracting the cost of goods sold (also called cost of revenue and other variations) from total revenue (also "total sales" and other variations):

gross income = total revenue – cost of goods sold

A business' gross income can be used to calculate its gross margin, a measure of profitability. Confusingly, gross margin is sometimes used as a synonym for gross income and is expressed as a dollar amount (or in another currency). The more precise usage, however, distinguishes gross margin from gross income, so that gross margin is an expression of gross income as a percentage of total revenue:

gross margin % = gross income ÷ total revenue * 100

What constitutes a good or bad gross margin depends on the industry. Providers of specialized services generally make higher margins than retailers, for example. Just as important as gross margins relative to industry peers are a company's gross margins from year to year. While a number of factors can cause falling margins, they generally deserve an explanation from management. Rising margins, on the other hand, are a sign of increased efficiency.

Here is an example of how to calculate gross income and gross margin, using Johnson & Johnson's (JNJ) income statement from the third quarter of fiscal 2015 (all amounts in millions of USD):

Sales to customers 17,102
Cost of products sold 5,224
Selling, marketing and administrative expenses 5,081
Research and development expense 2,154
In-process research and development 10
Interest (income) expense, net 91
Other (income) expense, net 420
Earnings before provision for taxes on income 4,122
Provision for taxes on income 764
Net earnings 3,358

This income statement was included in an investor presentation and does not show gross income. You can go to the SEC's website, where quarterly 10-Q filings are shown in a standardized format and "gross profit" will appear on the third line of the income statement. It is easy enough to calculate it yourself, however, by subtracting cost of goods sold (always the second line, here "cost of products sold") from total revenue (always the top line, here "sales to customers"):

gross income = total revenue ($17,102m) - cost of goods sold ($5,224m) = $11,878m

In order to put that number in context, divide it by the company's total revenues to obtain the gross margin:

gross margin = gross income ($11,878m) ÷ total revenue ($17,102m) = 69.45%

For comparison, that is slightly lower than its gross margin in the third quarter of 2014, at 70.76%. Other major drug makers have higher gross margins, but these do not engage in the lower-margin businesses Johnson & Johnson does, such as selling baby shampoo, bandages and moisturizers. 

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