Gross income

What does gross income mean, and why do you need to know about it? In the article, we will analyze whether gross income is before or after taxes and how to calculate it.

Definition of gross income

Gross income means the sum of money one makes, often in the form of a paycheck, before taxes are deducted. It affects an individual’s home mortgage eligibility and is used to compute state and federal income taxes.

For example, let’s say your gross weekly income is $400. But what is your net income? You only get $325, which is the balance of your income after taxes and other deductions. By analogy, you can answer what my gross income is.

How does gross income work?

Interest coverage ratio

Another simple definition of gross income is the total amount of your salary. Bonuses are factored into gross income as well. The gross income shown on a pay slip for hourly workers is equal to the hourly pay times the number of hours worked. W-2 forms that employees receive from their employers at tax filing also have gross income written on them.

In addition to a W-2 job, the total gross income may be derived from various sources. You might, for instance, earn money via alimony, consulting, self-employment, freelancing, or other sources.

Since you do not owe taxes on certain forms of income, you don’t need to disclose them on your tax returns. It covers a few other payments, such as income via state bonds and municipal. Moreover, gifts and inheritances, social security benefits, and certain life insurance payouts may not be required to be shown on individuals’ tax returns.

Note! Form W-2 is the annual “Wage and Tax Statement” that reports your taxable income earned from an employer to you and the Internal Revenue Service (IRS).

Comparing gross and net incomes

Gross income or pay is your total income before taxes, while net income refers to the income you take home after taxes are deducted from it.

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After deductions such as taxes have been taken out, the net income is significantly less than an individual’s gross income. Employers must deduct federal, social security taxes and others. Additionally, they deduct any benefits you’ve chosen to receive, such as healthcare premiums and deposits, to flexible spending or health savings accounts.

So next time someone asks you what your gross monthly income or earnings/salary is, all you have to do is tell them your actual pay without any deductions.

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Definition of adjusted gross income (pay)

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You understand how costs and deductibles can lower overall gross income by adding all the sources of earnings to obtain your overall income. It lowers your tax liability. 

The following factors may decrease your gross income:

  • Educator costs.
  • Some costs associated with conducting business, such as supplies, transportation, or machine rental costs
  • SIMPLE IRA, SEP-IRA, and 401(k) deductions for self-employed individuals.
  • The employment tax is deductible.
  • Payments made to certain retirement funds.
  • Financial firms’ penalties for premature withdrawals of savings.
  • Interest in student loans (with specific qualifications).
  • Deductions for health savings accounts (HSAs).
  • Alimony.

Adjusted gross income, mainly used as the foundation for your taxation, is the income an individual is left with after these deductions are made from your earnings.

The bottom line 

Knowing what gross income means is essential since you never know when you might have to calculate it. However, now it is not a problem to define gross income. You can calculate your monthly gross income by looking at the payslip you receive from your employer and adding any earnings from any side hustles such as freelancing or rental property earnings, etc.

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