Gross income refers to your total earnings before taxes and deductions are taken out. It includes income from all sources, such as wages, tips, investments, interest, pensions and more.
Your gross income is the beginning of the calculation to determine your tax bill for the year. You start with your gross income, remove any pre-tax deductions (for example, to a 401(k) plan), then subtract certain above-the-line tax deductions to get to your adjusted gross income, and then, after claiming either itemized deductions or the standard deduction, you end up with your taxable income.
Gross income is also used to calculate your eligibility for certain types of loans. For example, mortgage lenders will calculate your debt-to-income ratio — which measures how much of your monthly gross income goes toward debt payments — before offering you a mortgage.
Gross income for businesses is usually called gross profit, and is calculated by subtracting the cost of goods sold (COGS) from the total gross revenue that the company generated. It’s one benchmark for evaluating a company’s financial health.
What is gross income?
For many people, gross income is primarily the earnings received via a paycheck, which can be a combination of hourly wages, salary, commission and bonuses. In addition to wages, other sources of gross income may include:
- Alternative compensation for services rendered
- Business income
- Capital gains
- Dividends
- Gambling winnings
- Gas, oil, or mineral rights
- Income from discharged debt
- Income from a decedent or as an interest of an estate or trust (generally, assets inherited by a beneficiary aren’t considered income, but in some cases a beneficiary may owe inheritance tax)
- Interest from bank accounts, certificates of deposit (CDs), etc.
- Pensions and other retirement income
- Rental income
- Royalties
- Self-employment income
- Selling goods online or in-person
- Tips
Gross income is the starting point for calculating your tax liability. The sources of income above are generally subject to taxation and, therefore, included in calculating your gross income. However, non-taxable sources of income — such as inheritances, municipal or state bond income, workers’ compensation payments and life insurance proceeds — typically don’t contribute to your gross income for tax purposes.
After determining your gross income, applicable above-the-line deductions are subtracted to calculate your adjusted gross income (AGI), and then your AGI is reduced by your itemized deductions or the standard deduction, to get to your taxable income. This figure is used to determine the tax bracket you fall into based on your filing status.
In the business world, gross income is the calculation of total gross revenue minus the cost of goods sold (COGS). Unlike an individual — whose gross income is positive as long as they have income sources — a business could have a negative gross income if they are spending more on their products and services than they are earning in gross revenue.
Examples of gross income
Here’s an example of what gross income looks like for an individual on a weekly basis:
- 45 hours worked at $15 per hour = $675
- Commission = $150
- Bonus = $500
- Total weekly gross income = $1,325
Here’s an example of what a taxpayer’s gross income might look like on an annual basis:
- Annual salary: $55,000
- Annual bonus: $5,000
- Rental income: $10,000
- Interest: $675
- Stock dividends: $500
- Side business income: $10,000
- Selling goods online: $1,300
- Total annual gross income: $82,475
Here’s an example of a business’s annual gross income:
- Gross revenue: $275,000
- Cost of goods sold: $200,000
- Total annual gross income: $75,000
Why understanding gross income is important
Your taxable income is calculated from your gross income, and taxable income is important to understand because it determines how much you owe in both state and federal individual income taxes.
While state income tax brackets and rates will vary, the federal income tax rates for 2024 and 2025 across seven brackets are: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent. However, if your gross income is below a certain threshold, you might not be required to file taxes.
Gross income is also used by lenders to determine how much they will allow someone to borrow for a loan, like an auto loan or mortgage. The lender will determine how much to lend based on the individual’s debt-to-income ratio, or DTI. The DTI is determined by dividing monthly debt payments by monthly gross income.
The higher a borrower’s DTI, the less likely a lender will want to lend money and the higher the interest rate on the loan will be. Ideally, DTI should be no higher than 35 percent; however, some lenders will lend to borrowers with DTI as high as 50 percent, for certain types of loans.
For businesses, gross income may be positive or negative, and serves as an indicator of the company’s financial health and profitability.
Gross income vs. net income
Think of it this way: Gross income from employment is generally the amount advertised on the job posting, while net income is the amount you actually see in your bank account after taxes and deductions are taken out.
Deductions can include:
- Health insurance premiums
- Life insurance premiums
- Voluntary benefits (accident, sickness, critical injury, disability, etc.)
- Flexible spending account contributions
- Health savings account contributions
- Job-related expenses (uniforms, union dues, meals, travel, etc.)
- Retirement contributions
- Wage garnishments
- Child support payments
Most deductions reduce taxable income, and they’re known as pretax deductions. Other deductions, such as contributions to a Roth IRA and certain voluntary benefits, do not lower taxable income and are referred to as post-tax deductions.
Employers withhold state and federal income taxes and Medicare and Social Security taxes from your paycheck before you receive it. Meanwhile, it’s the responsibility of business owners and people who are self-employed, independent contractors or freelancers to pay their share of taxes from their gross income.
Net income is often called take-home pay, and should serve as the basis for creating a budget. Living expenses, bills, debt payments and other obligations should be budgeted based on your net income rather than gross income to account for the impact of taxes and other deductions. Budgeting based on your gross income likely will cause you to be short on your goals each month.
Here’s an example of why a budget should not be based on gross income. Sara has a monthly gross income of $4,000 and a net income of $3,000. She creates a budget with her gross income amount with total expenses equaling $3,500. Because Sara only brings home $3,000, she is short $500 on the monthly budget. Sara will either have to adjust her budget to account for the $500 or find a way to increase her net income by $500 to cover the remaining expenses.
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