Gross Income

Gross income is a term that refers to the total amount of money that an individual or a business earns before any deductions, taxes, or other expenses are taken out. It is an important concept to understand for both personal and professional purposes, as it affects how much tax one pays, how much one can borrow or invest, and how well one’s business is performing. In this blog article, I will explain what gross income is, how to calculate it, and why it matters.

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What is gross income for individuals?

For individuals, gross income is the sum of all the income that one receives from various sources, such as wages, salaries, tips, bonuses, commissions, interest, dividends, capital gains, rental income, alimony, pension, and so on. Gross income includes not only cash payments but also non-cash benefits or services that one receives as part of their compensation or income. For example, if an employer provides an employee with a car, a phone, or a health insurance plan, the value of these benefits is considered part of the employee’s gross income.

Gross income is different from net income, which is the amount of money that one actually takes home after subtracting deductions, taxes, and other expenses from their gross income. Deductions are expenses that one can subtract from their gross income to reduce their taxable income, such as student loan interest, IRA contributions, alimony payments, and so on. Taxes are the mandatory payments that one has to make to the government based on their taxable income and tax rate. Other expenses are the costs that one has to pay for living and working, such as rent, mortgage, utilities, transportation, food, clothing, and so on.

Gross income is also different from disposable income, which is the amount of money that one has left after paying taxes and other mandatory expenses from their net income. Disposable income is the money that one can use for saving or spending on discretionary items or activities, such as entertainment, travel, hobbies, and so on.

How to calculate gross income for individuals?

To calculate gross income for individuals, one has to add up all the sources of income that they receive in a given period of time, usually a year. For example, suppose that Alice earns $50,000 per year as a salary from her employer. She also receives $5,000 per year as a bonus and $2,000 per year as tips. She has a savings account that pays her $500 per year in interest and a stock portfolio that pays her $1,000 per year in dividends. She also rents out a spare room in her house and earns $6,000 per year in rental income. Her gross income for the year would be:

$50,000 + $5,000 + $2,000 + $500 + $1,000 + $6,000 = $64,500

This is the amount of money that Alice earns before any deductions or taxes are taken out. To find out her net income or disposable income, she would have to subtract her deductions (such as mortgage interest), taxes (such as federal and state income tax), and other expenses (such as insurance premiums) from her gross income.

Why does gross income matter for individuals?

Gross income matters for individuals because it affects how much tax they have to pay and how much money they have available for saving or spending. The higher one’s gross income is, the more tax they have to pay to the government. However, they may also be able to reduce their taxable income by claiming deductions or credits that lower their tax liability. For example, if Alice contributes $6,000 to an IRA account in a year (the maximum amount allowed in 2023), she can deduct this amount from her gross income and pay less tax on her retirement savings.

Gross income also matters for individuals because it affects their eligibility for certain benefits or programs that are based on their income level. For example,

To qualify for the earned income tax credit (EITC), a refundable tax credit for low- to moderate-income workers ¹, one has to meet certain requirements regarding their earned income (which is a subset of gross income) and their adjusted gross income (which is gross income minus certain deductions).
To qualify for Medicaid ² , a health insurance program for low-income people ³, one has to meet certain requirements regarding their modified adjusted gross income (which is adjusted gross income plus certain non-taxable incomes).
To qualify for a subsidized student loan ⁴, a type of federal loan with lower interest rates for students with financial need⁵, one has to meet certain requirements regarding their expected family contribution (which is based on their adjusted gross income and other factors).

Gross income also matters for individuals because it affects their ability to borrow money or invest money. Lenders and investors often use gross income as a measure of one’s financial stability and potential. The higher one’s gross income is,

The more likely they are to get approved for a loan or a credit card
The more favorable terms they can get for the loan or the credit card, such as lower interest rates, higher credit limits, or longer repayment periods
The more money they can borrow or invest, such as for buying a house, a car, or a business
The more options they have for choosing the type and duration of the loan or the investment, such as fixed-rate or variable-rate, short-term or long-term, and so on

What is gross income for businesses?

For businesses, gross incomes is the amount of money that a business earns from selling its goods or services before any deductions, taxes, or other expenses are taken out. It is also known as gross margin or gross profit. Gross incomes reflects how well a business is generating revenue from its core operations and how efficiently it is managing its cost of goods sold (COGS). COGS is the direct cost of producing or acquiring the goods or services that a business sells, such as raw materials, labor, and overhead.

Gross incomes is different from net incomes, which is the amount of money that a business earns after subtracting all deductions, taxes, and other expenses from its gross incomes. Deductions are expenses that a business can subtract from its gross incomes to reduce its taxable incomes, such as depreciation, amortization, interest, and so on. Taxes are the mandatory payments that a business has to make to the government based on its taxable income and tax rate. Other expenses are the costs that a business has to pay for running and growing its operations, such as rent, utilities, marketing, research and development, and so on.

Gross incomes is also different from operating incomes, which is the amount of money that a business earns from its core operations after subtracting operating expenses from its gross income. Operating expenses are the costs that a business incurs for running its day-to-day activities, such as salaries, wages, supplies, insurance, and so on. Operating income reflects how well a business is managing its operating efficiency and profitability.

How to calculate gross income for businesses?

To calculate gross income for businesses, one has to subtract the cost of goods sold (COGS) from the total revenue (TR) that a business generates from selling its goods or services in a given period of time, usually a quarter or a year. The formula for gross income is:

Gross Income = Total Revenue – Cost of Goods Sold

For example,

Suppose that ABC Company sells 10,000 units of its product at $100 per unit in a year. Its total revenue for the year would be $1 million ($100 x 10,000).
Suppose that ABC Company spends $40 per unit to produce or acquire its product. Its cost of goods sold for the year would be $400,000 ($40 x 10,000).
ABC Company’s gross income for the year would be $600,000 ($1 million – $400,000).

This is the amount of money that ABC Company earns from selling its product before any deductions or taxes are taken out. To find out its net income or operating income,

It would have to subtract its deductions (such as depreciation), taxes (such as corporate incomes tax), and other expenses (such as marketing) from its gross incomes.
It would have to subtract its operating expenses (such as salaries) from its gross incomes.

Why does gross income matter for businesses?

Gross incomes matters for businesses because it affects how much tax they have to pay and how much money they have available for reinvesting or distributing. The higher a business’s gross incomes is,

The more tax it has to pay to the government. However, it may also be able to reduce its taxable income by claiming deductions or credits that lower its tax liability. For example,
- If ABC Company spends $100,000 on research and development in a year (a deductible expense), it can deduct this amount from its gross incomes and pay less tax on its innovation.
- If ABC Company qualifies for a tax credit of $50,000 for hiring veterans in a year (a non-refundable credit), it can subtract this amount from its tax liability and pay less tax on its social responsibility.
The more money it has available for reinvesting in its growth or distributing to its owners or shareholders. For example,
- If ABC Company has a high gross incomes margin (the ratio of gross incomes to total revenue), it means that it is generating more revenue than it is spending on producing or acquiring its product. This indicates that it has a strong competitive advantage and a high potential for growth. It can use this excess money to invest in new products, markets, technologies, or acquisitions that can increase its future revenue and profit.
- If ABC Company has a low gross incomes margin (the ratio of gross incomes to total revenue), it means that it is spending more on producing or acquiring its product than it is generating in revenue. This indicates that it has a weak competitive advantage and a low potential for growth. It may have to cut costs or increase prices to improve its.

How can I reduce my personal income taxes?

There are several ways to reduce your personal income taxes, depending on your situation and goals. Here are some of the most common and effective methods:

Contribute to a retirement account. By saving for your future through a traditional 401(k) or IRA, you can lower your taxable income in the present. The money you put into these accounts is deducted from your gross income, reducing the amount of tax you owe. Plus, you get tax-deferred growth on your investments until you withdraw them in retirement. You can use our pension tax relief calculator¹ to see how much you can save by contributing to a retirement account.
Claim tax credits. Tax credits are dollar-for-dollar reductions of your tax liability, meaning they lower your tax bill by the amount of the credit. There are many types of tax credits available for different purposes and situations, such as the earned income tax credit² for low- to moderate-income workers, the child tax credit³ for parents, and the education credit ⁴ for students. You should check if you qualify for any of these credits and claim them on your tax return.
Deduct your expenses. Deductions are expenses that you can subtract from your gross income to reduce your taxable income. There are two types of deductions: standard deduction and itemized deductions. The standard deduction is a fixed amount that varies by your filing status and is available to everyone. The itemized deductions are specific expenses that you have to list and prove on your tax return, such as mortgage interest, charitable contributions, medical expenses, and so on. You should compare the standard deduction and the itemized deductions and choose the one that gives you the bigger benefit.
Adjust your withholding. Your withholding is the amount of tax that your employer takes out of your paycheck and sends to the IRS on your behalf. If you withhold too much, you will get a refund when you file your tax return, but you will also give the government an interest-free loan of your money. If you withhold too little, you will owe money when you file your tax return, and you may also face penalties and interest charges. You should adjust your withholding to match your expected tax liability as closely as possible, so that you neither overpay nor underpay your taxes throughout the year. You can use the IRS Tax Withholding Estimator ⁵ to help you do this.
Plan ahead. One of the best ways to reduce your taxes is to plan ahead and take advantage of opportunities and strategies that can lower your tax bill in the future. For example, you can invest in tax-exempt bonds that pay interest that is not subject to federal income tax, or in tax-advantaged accounts such as Roth IRAs or 529 plans that offer tax-free growth or withdrawals for qualified purposes. You can also defer some of your income to the next tax year by delaying invoices or bonuses, or accelerate some of your deductions to the current tax year by prepaying expenses or making donations.

These are some of the ways to reduce your personal income taxes legally and effectively. However, every person’s situation is different, and there may be other factors or options that apply to you. Therefore, it is always advisable to consult a professional tax advisor or accountant before making any major financial decisions or filing your tax return.