Gross income is the total income an individual or business earns before any deductions or taxes are applied. It represents the sum of all earnings, including wages, salaries, bonuses, rental income, investment income, and any other sources of revenue. Understanding gross income is essential for financial planning, tax reporting, and evaluating overall financial health.
For Individuals
For an individual, gross income includes:
- Wages and salaries: The total pay received from employment before deductions such as taxes, retirement contributions, or health insurance
- Bonuses and commissions: Additional income earned through performance-based incentives.
- Investment income: Dividends, interest, and capital gains from stocks, bonds, or other investments.
- Rental or business income: Earnings from renting out property or running a business.
- Other sources: Alimony, royalties, or any other taxable income.
Example:
If an employee earns a salary of $50,000 per year, receives a $5,000 bonus, and earns $2,000 in investment income, their gross income is:
$50,000 + $5,000 + $2,000 = $57,000
For Businesses
For a business, gross income (also referred to as gross profit) is calculated as:
Gross Income = Revenue – Cost of Goods Sold (COGS)
- Revenue: The total sales or earnings generated from the business’s primary operations.
- Cost of Goods Sold (COGS): Direct costs associated with producing goods or services, such as materials and labor.
Example:
If a company generates $200,000 in revenue and its COGS is $120,000, the gross income is:
$200,000 – $120,000 = $80,000
Key Points to Remember
- Gross income does not account for taxes or other deductions.
- It is a crucial figure for calculating taxable income and assessing financial performance.
- For individuals, it provides a snapshot of total earnings.
- For businesses, it helps evaluate profitability before operating expenses, taxes, and other costs.
Gross income is a foundational financial concept that helps individuals and businesses understand their total earnings. By knowing your gross income, you can better plan budgets, manage taxes, and make informed financial decisions.
