What is gross income?

Gross income is the amount you earn before any taxes or other deductions are taken out. It affects the amount a person can borrow to purchase a home, and it is also used to determine federal and state income taxes. Gross income can come from salary, hourly wages, tips, freelance work, and many other sources. Net income is the income that you receive after taxes and other deductions are taken out. It is also known as “take-home pay.” Adjusted gross income (AGI) is your gross income after deducting certain specified deductions like student loan interest. This is the basis for your income taxes.

How Gross Income Works

Gross income is the amount you earn, usually in a paycheck, before payroll taxes and other deductions are taken out. It influences the amount you can borrow to buy a home, and it is also used to determine federal and state income taxes. Here are some examples of sources from which gross income can come:

Examples of Gross Income

Let’s say you work at a clothing store in the mall. You are paid hourly. You earn $15 per hour and work 20 hours a week. Your total weekly gross income is $300 (15 × 20). You work for 50 weeks a year. Your annual gross income is $15,000. This is the amount you earn before any taxes are deducted from your paycheck.

After two weeks of work, you receive a paycheck. If you earn $300 a week, your gross income for two weeks would be $600. However, due to taxes, your take-home pay is less than $600. This is your net income, the amount you actually take home. It may be closer to $500 or $400 depending on factors like the state you live in and whether you contribute any money to a retirement account.

Here’s another example. You are a marketing coordinator and earn a salary of $50,000 a year. This is your gross income. After retirement contributions and taxes, your total net income for the year is less than $50,000. This lesser amount is your salary divided by 26 paychecks in the year, paid to you every other Friday. It is not based on work hours because it is a fixed salary that you agreed to when you were hired at the company.

And now here is a third example. You are a marketing coordinator earning a salary of $50,000. You also have a side job where you make and sell pillows online. You earn $500 a month from your pillow business. By the end of the year, your gross income is the sum of your pillow business income before taxes and expenses ($6,000) and your salary as a marketing coordinator ($50,000). Your total gross income is $56,000 for the year.

Gross Income vs. Net Income

Gross Income Net Income
Your gross income before taxes or deductions
Your income based on your salary or wages, plus any other income sources you have
Based on the taxes withheld from your paychecks, location, deductions, and more

Gross income is the total of all your income. It is larger than net income, which is the income that remains after taxes and other deductions. Employers are required to withhold taxes for federal income tax, Social Security tax, and Medicare taxes. Benefits you elected, such as health insurance premiums and contributions to a flexible spending account or health savings account, are also deducted.

Net income is what you will use to budget. It is the amount you can spend. If you are a freelancer or independent contractor, you will receive gross income. You will need to set aside an amount for taxes yourself since there is no employer withholding it on your behalf. An accountant can help you determine the amount you need to allocate, and you may also need to file quarterly estimated tax payments.

Income

Adjusted Gross Income (AGI)

After calculating all your income sources to determine your total gross income, you can find out how expenses and deductions can reduce it, which in turn decreases your tax burden. This is known as adjusted gross income.

Your gross income can be adjusted by: certain business expenses, such as material costs and travel expenses or equipment rental fees educational costs interest on student loans (with some restrictions) contributions to certain retirement accounts penalties from financial institutions for early withdrawal of deposits paid chimney contributions direct wages for temporary service sent directly to the employer spouse paid self-employment tax deduction half self-employment tax contributions SEP-IRA and SIMPLE IRA and 401(k) for self-employed business owners.

Frequently Asked Questions (FAQs)

How is gross income calculated? Gross income is calculated by taking your salary and multiplying it by the duration you work for. You will also need to add in any other sources of income such as alimony, capital gains, and annuities, etc. For example, if your salary is $50,000 a year, you would multiply it by one year to get $50,000. If you also earned $5,000 from capital gains on stocks, you would add it to $50,000, resulting in a total gross income of $55,000.

What is adjusted gross income? Adjusted gross income is your gross income after calculating deductions such as student loan interest, some retirement account contributions, and more. Adjusted gross income is what your tax bill is based on every year during tax season. The lower your adjusted gross income is, the less income tax you will pay.

Source: https://www.thebalancemoney.com/what-is-gross-income-1293696