What is Gross Income?

Gross income or gross pay is the total pay of an individual from all their income sources before taxes and other deductions. For a company, gross income is the difference between the company's revenue and the cost of goods sold (COGS). Employers can pay the gross income daily, weekly, monthly, or annually.

How Does Gross Income Work? 

For example, assume an employees gross monthly salary is $3,500 before any deductions. After taxation and other deductions, the employee receives $2,500 as the net salary even when the gross income is $3,500. The Internal Revenue Service demands that all employees report their income tax returns every year. Lending institutions and landlords use an individuals gross income to find out whether an individual qualifies for a loan or a rental apartment.

Sources of Income

The gross income of an individual may come from different sources including;

• Salaries and wages from the place of employment
• Income from an individuals rental property
• Side hustles income
• Self-employment or business income
• Dividends, interests, or capital gains from investments
• Spousal child support
• Life insurance income, pensions, and annuities
• Gross profits from sales
• Selling stuff at craft fairs, swap meet, or other venues, and
• Selling items on eBay or Amazon. The money the individual receives after selling the items count as gross income.

More sources of income are available, and there is tax software that assists individuals to pinpoint all their income sources the government needs to know.

Exceptions from gross income: U.S. Federal Income Tax Law

Courts in different countries are giving the phrase all income sources a broad meaning and numerous exclusions. However, the Us Federal Income Tax Law allows the exclusion of some income sources from the gross income. Among them are the following income sources;

• The Federal tax law excludes interests from state and municipal bonds.
• Social security benefits. The exemption amount varies yearly, and it does not exempt individuals within a certain income bracket.
• The federal tax law excludes proceeds from life insurance in case the person under insurance dies.
• The federal tax law excludes gains ranging between $250,000 and $500,000 after a person sells their place of residence.
• Employee benefits like health insurance and life insurances of up to $50,000.
• Meal and travel allowances from the employer. However, most employers include this in gross income.
• Inheritances and gifts.

Adjusted Gross Income (AGI)

After subtracting all the deductions from the gross income, what remains is the adjusted gross income. To arrive at the taxable income, the employer subtracts all other deductions from the adjusted gross income. Taxable income becomes less than the gross income after all the deductions. An individual fills in their gross income on the first page of the income tax return form, and it will determine the taxable income. Tax software is available to automatically calculate the individuals adjusted gross income, and other tax calculations.

How to Calculate Gross Income

For an individual receiving an annual salary, the formula for calculating his/her gross monthly salary is; Gross income = annual salary / 12 For a business entity, the gross income or gross profit is; Gross income = sales revenue the cost of goods sold Sales revenue refers to the money that a business generates after selling its goods and services before deductions. Cost of goods sold includes a company's production costs, manufacturing costs, supply expenses, and labor costs.

An example of gross income in business

If a car manufacturing company makes $3 million in one year after selling motor vehicles but uses $1.5 million to purchase and repair vehicle parts, the gross profit is $1.5 million. The company subtracts the direct costs of manufacture from its sale of goods to remain with the gross profit.

Example of individual gross income

If an individual makes $200,000 from his/her one job and a combination of $80,000 from a side job and other income sources, the gross income would be $280,000. The gross income comes about when the individual combines income from all their income-generating activities.