What Is Gross Income?
Gross income for an individual—also known as gross pay when it's on a paycheck—is the individual’s total pay from his or her employer before taxes or other deductions. This includes income from all sources and is not limited to income received in cash; it also includes property or services received. Gross annual income is the amount of money a person earns in one year before taxes and includes income from all sources.
For companies, gross income is interchangeable with gross margin or gross profit. A company’s gross income, found on the income statement, is the revenue from all sources minus the firm’s cost of goods sold (COGS).
- Gross income for an individual consists of income from wages and salary plus other forms of income, including pensions, alimony, interest, dividends, and rental income.
- Gross income for a business, also known as gross profit or gross margin, includes the gross revenue of the firm less cost of goods sold, but it does not include all of the other costs involved in running the business.
- Individual gross income is part of an income tax return and—after certain deductions and exemptions—becomes adjusted gross income and then taxable income.
Understanding Gross Income
Individual Gross Income
An individual’s gross income is used by lenders or landlords to determine whether said individual is a worthy borrower or renter. When filing federal and state income taxes, gross income is the starting point before subtracting deductions to determine the amount of tax owed.
For individuals, the gross income metric used on the income tax return includes not just wages or salary but also other forms of income, such as tips, capital gains, rental payments, dividends, alimony, pension, and interest. After subtracting above-the-line tax deductions, the result is adjusted gross income (AGI).
Continuing down the tax form, below-the-line deductions are taken from AGI and result in a taxable income figure. After applying any allowed deductions or exemptions, the resulting taxable income can be significantly less than an individual’s gross income.
There are income sources that are not included in gross income for tax purposes but may still be included when calculating gross income for a lender or creditor. The most common nontaxable income sources are certain Social Security benefits, life insurance payouts, some inheritances or gifts, and state or municipal bond interest.
Business Gross Income
A company’s gross income, or gross profit margin, is the most simple measure of the firm’s profitability. While the gross income metric includes the direct cost of producing or providing goods and services, it does not include other costs related to selling activities, administration, taxes, and other costs related to running the overall business.
Example of Individual Gross Income
Assume that an individual has a $75,000 annual salary, generates $1,000 a year in interest from a savings account, collects $500 per year in stock dividends, and receives $10,000 a year from rental property income. His or her gross annual income is $86,500.
Example of Business Gross Income
Gross income is a line item that is sometimes included in a company’s income statement but is not required. If not displayed, it’s calculated as gross revenue minus COGS.
Gross Income=Gross Revenue−COGSwhere:COGS=Cost of Goods Sold
Gross income is sometimes referred to as gross margin. Then there's gross profit margin, which is more correctly defined as a percentage, and is used as a profitability metric. The gross income for a company reveals how much money it has made on its products or services after subtracting the direct costs to make the product or provide the service.