Gross income for an individual—also known as gross pay when it’s on a paycheck—is an individual’s total earnings before taxes or other deductions. This includes income from all sources, not just employment, and is not limited to income received in cash; it also includes property or services received.
For companies, gross income 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).
Understanding Gross Income
There are different components to gross income in respects to an individual and a company. An individual will easily be able to determine their gross income by consulting a recent pay stub or calculating their hours worked and wage. Alternatively, gross income of a company may require a bit more computation.
An individual’s gross income is used by lenders or landlords to determine whether that person 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.
A company calculates gross income to understand how the product-specific aspect of its business performed. By using gross income and limiting what expenses are included in the analysis, a company can better analyze what is driving success or failure. For example, if a company is interested in knowing how a specific product line is performing, it does not want to see the company's rent expense included in the performance as that is an unrelated, administrative expense.
How to Calculate Gross Income
The approach to determining gross income for an individual is slightly different than the approach for a business. Although both calculations are similar, each type of entity uses different classifications of income and expenses.
Individual Gross Income
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 payments, dividends, alimony, pension, and interest. After subtracting above-the-line tax deductions, the result is adjusted gross income (AGI).
There are income sources that are not included in gross income for tax purposes but still may be included when calculating gross income for a lender or creditor. Common nontaxable income sources are certain Social Security benefits, life insurance payouts, some inheritances or gifts, and state or municipal bond interest.
For non-tax purposes, individuals can usually use their total wages as gross income. When applying for a loan, individual gross income will equal the amount of money the individual earns prior to any taxes being deducted or any expenses having been paid. Some lenders may require the use of AGI to standardize how gross income is calculated.
Gross income is sometimes referred to as gross margin. There’s also gross profit margin, which is more correctly defined as a percentage and is 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.
Business gross income can be calculated on a company-wide basis or product-specific basis. As long as the company is using a chart of accounts that allows tracking of revenue by product and cost by-product, a company can see how much profit each product is making.
Gross Income vs. Net Income
Gross income and net income are two terms commonly used by businesses to describe profit. Both terms can also be used to explain how much money a household is making or taking home.
For an individual, net income is the total residual amount of income remaining after all personal expenses have been paid for. Personal net income is calculated as the total amount of revenue earned less the total amount of personal expenses. This differs from gross income which limits what can be deducted from total revenue earned. An individual's net income more closely resembles their final paycheck amount; although the individual likely has more expenses than what is deducted from their pay, their paycheck is a good example of their revenue being reduced by costs.
For a business, net income is the total amount of revenue less the total amount of expenses. These expenses include the cost of goods sold just like gross income. However, net income also includes selling, general, administrative, tax, interest, and other expenses not included in the calculation of gross income. Gross income is a much higher view of a company, while net income incorporates every facet of cost.
Individual Gross Income Example
Assume that an individual has a $75,000 annual salary, generates $1,000 a year in interest from a savings account, collects $500 per year in stock dividends, and receives $10,000 a year from rental property income. Their gross annual income is $86,500. Alternatively, the individual can calculate their monthly gross income is approximately $7,200.
Imagine that the same individual pays $1,500 per month in rent, $450 in student loans, and $300 towards an auto loan. All three of these expenses are excluded from the calculation of gross income for non-tax purposes. An individual's gross income only considers the revenue earned.
In regards to the individual's federal income tax, let's imagine the individual paid $500 in student loan interest for the prior year. When filing their tax return, the student loan interest is an above-the-line deduction used to factor in adjusted gross income. Assuming the individual earned the same amount of money this year as last, the individual's AGI is $86,000 ($86,500 - $500).
Business Gross Income Example
Apple's consolidated statement of operations reported total net sales of $97.278 billion for the three-month period ending March 2022. The company spent $49.290 billion to generate those products and spent an additional $5.429 billion on services also as part of its cost of goods sold. By subtracting Apple's net sales from the total cost of goods sold, Apple reported a gross income of $42.559 billion.
Apple also incurred $6.3 billion in research and development costs, $6.2 billion in selling, general, and administrative costs, and $5.1 billion in income taxes. All three of these expenses are excluded when calculating gross income. A company's gross income only includes the company's net sales less COGS.