Gross income represents the total earnings received by an individual or business before any deductions, taxes, or expenses reduce that amount. For individuals, this includes wages, salaries, tips, commissions, rental income, investment income, and business earnings. For businesses, gross income—often called gross profit—is the total revenue from sales minus the direct costs of goods sold (COGS), but before operating expenses.

Gross Income for Individuals

Your gross income is the sum of all income from various sources within a tax year. According to the IRS, it includes “all income from whatever source derived” unless specifically excluded by law (IRS Publication 17).

Key components include:

  • Wages and Salaries: The total pay before any taxes or benefits deductions. For example, a $60,000 annual salary is your gross income from employment.
  • Tips and Commissions: All tips from service jobs and sales commissions are taxable and must be included.
  • Business Income: The total revenue from self-employment or side businesses before deducting business expenses.
  • Rental Income: All rent received from tenants before subtracting related expenses like repairs or mortgage interest.
  • Investment Income: Interest, dividends, and realized capital gains from selling assets.
  • Other Income: Includes alimony (for agreements before 2019), gambling winnings, royalties, and unemployment benefits.

Gross income does not include non-taxable items like child support, gifts, or certain insurance proceeds.

Gross Income for Businesses

In the business context, gross income typically refers to gross profit:

  • Revenue: Total sales from products or services.
  • Cost of Goods Sold (COGS): Direct costs to produce those goods or services, such as materials and labor.
  • Gross Profit (Gross Income): Revenue minus COGS, showing the profitability from core operations before deducting overhead costs.

For example, if a retailer sells goods worth $50,000 and the COGS is $30,000, the gross income (gross profit) is $20,000.

Why Gross Income Matters

Gross income is crucial because:

  • It is the foundation for calculating taxable income (learn more about taxable income). Adjusted Gross Income (AGI) further adjusts this figure based on specific deductions (see AGI details).
  • Lenders use gross income to assess loan eligibility as it provides a standard measure of earning capacity.
  • Knowing your gross income helps with better budgeting by understanding the difference between gross and net income.

Examples

Salaried Employee: Sarah earns a gross annual salary of $70,000. Each paycheck reflects a gross amount before taxes and benefits are deducted.

Freelancer: David earns $2,800 in a month from freelance projects—the total before business expenses deduct from this is his gross income.

Small Business: “Pet Paradise” generates $35,000 in sales with $15,000 in direct costs, resulting in a gross income (profit) of $20,000 to cover operating expenses.

Tips for Managing Gross Income

  • Focus on negotiating your gross salary during job offers as it sets your earning baseline.
  • Track all income sources meticulously, especially if self-employed or have side gigs.
  • Businesses should aim to increase gross revenue to improve profitability.
  • Understand deductions from gross to net income to plan savings and investments effectively.

Common Misunderstandings

  • Gross income is not the same as take-home pay or net income.
  • All income sources should be reported unless explicitly excluded by tax laws.
  • Gross profit in business excludes operating costs which affect net profit.

Further Reading

Authoritative Source

For detailed IRS guidance, see IRS Publication 17 which outlines gross income and its tax implications.

This article aims to clarify gross income’s definition and importance for managing your finances and taxes effectively.