What Is Gross Income?
Gross income has two different definitions, depending on whether it's used in the business sense or refers to an individual's wages and other income.
For an individual, the gross income metric, also known as gross pay, is the individual's total pay from his employer before taxes or other deductions. This includes income from all sources and is not limited to income received in cash, but it can also include property or services received.
For companies, the gross income terminology 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).
What Does Gross Income Tell You?
An individual's gross income is used by lenders or landlords to determine whether an 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 income, dividends, alimony, pension, and interest income. 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 applicable 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.
- Gross income for an individual consists of income from wages and salary, and 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.
Example of Individual Gross Income in Use
As an example, assume that an individual has a $75,000 annual salary. He also generates $1,000 a year in interest from a savings account, collects $500 per year in dividends from a company he owns stock in, and receives $10,000 a year from rental property income. His 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.
- Company Gross Income = Gross Revenue - Cost of Goods Sold (COGS)
Gross income is sometimes referred to as gross margin; however, gross margin is more correctly defined as a percentage, 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.