# Gross Income and How to Calculate it

## Gross Income and How to Calculate it

Gross income is the total revenue that a person makes before paying taxes and claiming deductions or credits. When the person claims deductions, gross becomes net income.

If you take a look at a pay stub, then net income is what you see after paying taxes, so it’s always lower than gross income. The only exception is when the person is exempt from paying taxes.

## Understanding Gross Income

Every taxpayer has to pay taxes. Businesses and individuals get profit and have to file tax returns. It means there is individual and business gross income. Here’s what you need to know about these two types.

### Individual Gross Income

Often an individual’s gross revenue is a tool used by lenders and landlords to check if they can repay the debt in the future or pay for rent.

Gross income for individuals is also a starting point. When the taxpayer determines their income, then they can start claiming deductions and credits to figure out how much taxes they owe to the IRS.

The gross income doesn’t just include typical income sources like wages and salaries, but also other forms of revenue, such as capital gains, tips, rentals, alimony, pension, interest, and dividends.

Upon subtraction of all above-the-line tax deductions, the rest is considered an adjusted gross income (AGI).

Subtracting deductions significantly reduces taxable income. Some income sources won’t be included when calculating gross income for tax purposes. But even so, these sources should be included in gross revenue calculation for lenders or creditors.

Typically, nontaxable sources of revenue include life insurance, Social Security benefits, state and bond interest, gifts, or inheritance.

In some cases, the calculation of business gross income is included in the company’s income statement. If it’s not the case, then it is calculated as gross revenue minus COGS (cost of goods sold).

The calculation looks as follows:

Gross revenue – COGS

Usually, gross revenue is interchangeable with gross margin. Businesses also use a gross profit margin term that offers a more precise percentage and is utilized as a profitability metric.

The company’s gross income shows how much money is made by selling its products or services upon subtracting the cost to make these goods or provide services.

Note: gross income does include the direct cost of providing services or producing goods; it doesn’t include such related expenses as administration, selling of goods services, taxes, and other similar business-related costs.

## How does Gross Income Work?

Use paychecks to determine gross income. It can consist of hourly wages, salary, a combination of these options, etc. But it could also consist of other revenue income, such as alimony, pension, rental income, etc. But these revenue sources are only partly subject to taxes. Other gross income sources are subject to taxation:

• alternative compensation;
• revenue from a forgiven debt;
• winnings from gambling activities;
• rights to get revenue from mineral, oil, gas reserves;
• interest from CDs (certificates of deposit), bank accounts, etc.;
• income generated thanks to selling goods online or in person;
• revenue generated from interest on estates or trust.

Make sure to check the IRS official website to find nontaxable sources of income, such as municipal or state bonds, compensation payments (in case of injuries at work), inheritance, life insurance proceeds, etc. If you recently gained revenue from one or several of these sources, they don’t increase your tax revenue.

Salaried employees get withholdings from their paychecks every month. For instance, employers withhold taxes to pay for Social Security, Medicare, federal and state income, etc. Withholdings are calculated according to an informational tax form employees have to fill out upon their employment.

Business owners, self-employed individuals like freelancers, independent contractors, and others have to withhold taxes from their revenue.

A company’s gross revenue is calculated by using the formula posted above in this article. Upon subtracting the cost of goods sold, gross revenue is referred to as gross margin.

## How to Calculate Gross Income

The gross revenue of an individual, as mentioned, is needed mainly to lend money or rent an apartment or house. Gross revenue is also the first step to calculating taxes and filling out return forms. Check below how to calculate gross income as an individual and a business.

### Gross Income for an Individual

As mentioned, gross revenue is how much you make before claiming deductions and paying taxes, so you have to determine all your revenue sources. Start by checking the IRS to determine what sources are eligible and what sources can be omitted.

Typically, salaried employees have their annual salaries or wages prior to tax as their gross income. But sometimes, employees may have other revenue sources that they have to disclose and include. Include dividends on stocks, rental property gains, etc. Add up all sources of revenue to get gross income.

Here’s an example:

Suppose Andrew wants to calculate his gross income. He earns an annual income of \$110,000 from his financial accounting job. He also owns the property and earns \$50,000 in rentals. Andrew has \$15,000 in dividends from owned shares at BusinessExample and \$7,000 as interest revenue from a personal savings account.

This is howAndrew calculates his gross income:

110,000 + 50,000 + 15,000 + 7,000 = \$182,000

Gross profit has to be included in the income statement of a company. It’s the company’s gross margin for the year prior to deducting any interest, indirect expenses, taxes, deductions, etc.

The formula to calculate the gross income is as follows:

Gross Revenue – Cost of Goods Sold (COGS) = Gross Income

Here’s an example:

Let’s assume there is a company called Privacy & Security. It’s a company that provides security services. Their gross revenue is \$2,500,000, and their business’ related expenses are as follows:

• supply expenses: \$80,000;
• costs related to providing services: \$450,000;
• equipment: \$570,000.

Here’s how the accountant should calculate company’s gross profit:

(\$2,500,000) – (\$80,000 + \$450,000 + \$570,000)

(\$2,500,000) – (\$1,028,000) = 1,472,000

It’s just an example. The company also may have other expenses. Moreover, the company may have investments into other businesses and get dividends from interest. The company should also disclose all sources of income.