What Is Gross Income?

Gross income is the total earnings an individual or business receives minus taxes, deductions, or other expenses.

For employees, gross income includes everything from wages and salaries to bonuses and tips. Gross income serves as the starting point for determining tax obligations and calculating take-home pay. Knowing how to calculate gross income is crucial for employees and employers, given its essential role in payroll calculations and tax reporting.

Gross income can differ widely from country to country due to varying tax rules, social security contributions, and employment laws. For businesses operating internationally, calculating gross income across different locations is critical to staying compliant and ensuring accurate and fair compensation. This financial due diligence ensures employees feel valued and are fairly treated, regardless of where they work.

How to calculate gross income

Calculating gross income depends on whether the income is generated from an individual or a business. Here's a simple breakdown for both:

To calculate an individual’s gross income:

1. Begin with base salary or hourly wages.

2. Add other income sources:

• Bonuses and commissions
• Tips
• Overtime pay
• Investment income (dividends or interest)
• Rental income
• Alimony (for divorces finalized before 2019)
• Pension payments

For salaried employees, gross income is their annual salary before any deductions.

For hourly employees, find gross wages by multiplying the hourly rate by the number of hours worked per week, then multiply the result by the number of weeks worked in a year.

Example for an hourly worker:

• Hourly rate: EUR 20/hour
• Hours per week: 40
• Weeks per year: 52

Annual gross income:  20 × 40 × 52 = EUR 41,600

Certain income types may be excluded from gross income calculations for tax purposes, depending on local regulations. These exclusions often vary by country but may include specific government benefits, life insurance payouts, or certain gifts.

For businesses

For businesses, gross income is often called gross profit and is calculated a bit differently:

1. Start with total revenue from all sources.
2. Subtract the cost of goods sold (COGS), also known as the cost of sales in some regions. COGS typically include:

• Raw materials
• Direct labor costs
• Manufacturing overhead directly tied to production

The formula is:

Gross Income = Total Revenue - Cost of Goods Sold

Example for a business:

• Total revenue: US$500,000
• Cost of goods sold: US$300,000
• Gross income: $500,000 - $300,000 = US$200,000

Importance in international employment

Calculating gross income gets trickier with international employment due to different tax laws, social security systems, and regulations. Businesses need to consider:

• Local definitions of taxable income
• Currency exchange rates
• Country-specific employee benefits or allowances
• International tax treaties

Determining accurate gross income calculations is vital for:

• Complying with local labor laws
• Correctly withholding taxes
• Ensuring fair compensation globally
• Accurately reporting and budgeting finances

Where to find gross income

Locating your gross income means tracking down all sources of earnings for an individual or business. This step is critical for accurate financial reporting, tax compliance, and effective payroll management, especially when working internationally.

For individuals

Individuals can find their gross income information from various sources, depending on their employment status and income types. Common sources include:  

• Pay stubs. Your pay stub or payslip is the most accessible place to find your gross income. Look for the section labeled "Gross Pay" or "Total Earnings," which shows your earnings before deductions.
• W-2 form. In the U.S., your W-2 form summarizes your annual gross income. Check Box 1 for "Wages, tips, other compensation."
• 1099 forms. As an independent contractor, you’ll receive 1099 forms from clients detailing your gross earnings.
• Bank statements. For those who are self-employed or have multiple income streams, bank statements help track deposits that comprise your gross income.
• Investment account statements. These statements disclose income from investments, like dividends, interest, and capital gains.
• Rental income records. Property owners can find gross rental income by reviewing rental agreements and payment records.

For businesses

Businesses have several key financial documents and systems that provide information on gross income. These sources are essential for accurate financial reporting and strategic decision-making:  

• Income statement. Akin to a profit and loss statement, this document shows total revenue at the top, representing gross income before deducting expenses.
• Sales records. Detailed sales logs or point-of-sale reports provide a clear view of gross income.
• Invoicing systems. Service-based businesses can use invoicing software to generate reports on total billings reflecting gross income.
• Bank statements. Business bank statements help verify income deposits and ensure they match other financial records.
• Accounting software. Modern accounting platforms offer reports that clearly display gross income figures.

International considerations

When tracking gross income for international employees or businesses:

• Local pay documentation. Different countries may use unique forms or payslips to report gross income. Get familiar with these local documents.
• Currency conversion. Using the correct exchange rates ensures accurate reporting when dealing with multiple currencies.
• Benefits and allowances. Some countries include specific benefits or allowances in gross income. Check local regulations to ensure you account for all components.
• Tax authority websites. Many countries' tax authorities provide guidelines on how to find and report gross income according to local laws.

Knowing where to pinpoint gross income information is crucial to ensure accurate payroll tax reporting and financial planning data. This data is particularly valuable when managing international workforces, helping organizations remain compliant and precise in diverse regulatory environments.

Gross vs. net income

Grasping the difference between gross and net income is essential for any business and individual, especially those operating or working globally. Each metric offers unique insights into financial health and performance.

Gross income

Gross income, or gross profit, is the total earnings before any deductions. For businesses, this is total revenue after subtracting the direct costs associated with producing goods or services (known as the cost of goods sold or COGS). This metric reflects earnings before accounting for other expenses. Gross income is helpful because it:

• Shows overall earnings potential.
• Helps evaluate pricing strategies and production costs for businesses or salary negotiations for individuals.
• Provides insight into the ability to profit from primary activities or work.

Net income

Net income, or the bottom line, remains after deducting all expenses, taxes, and costs from gross income. For businesses, it represents actual profit. For individuals, it's the take-home pay. Net income is a vital metric because it:

• Reflects overall profitability or financial health.
• Is used to calculate earnings per share (EPS) for publicly traded companies and disposable income for individuals.
• Indicates how well one manages total expenses.

Fundamental differences worth acknowledging

• Calculation. Gross income only factors in total earnings, while net income includes all deductions, such as taxes and other withholdings.
• Insight provided. Gross income highlights total earning potential, whereas net income gives a comprehensive view of actual financial gain.
• Use in financial analysis. Gross income calculates the gross profit margin for businesses, while net income determines the net profit margin or actual earnings.
• Relevance to stakeholders. Investors and analysts often focus on net income, representing the final profit available for distribution or reinvestment. For individuals, net income is crucial for budgeting and financial planning.

For businesses navigating international markets, gross and net income becomes more complex due to varying tax rates, currency exchange fluctuations, and different standards across countries.

Gross income examples 

To clarify the concept of gross income, let’s walk through some practical examples for an individual and a business.

Examples of individual gross income

Meet Alex, a talented graphic designer with a range of income sources:

• Annual salary from his primary job: US$80,000
• Income from freelance projects: $20,000
• Dividends from investments: $4,000
• Interest earned from a savings account: $600
• Rental income from a small apartment: $10,000

To calculate Alex’s gross income:

• Gross Income = Salary + Freelance Income + Dividends + Interest + Rental Income
• Gross Income = $80,000 + $20,000 + $4,000 + $600 + $10,000 = $114,600

So, Alex’s total gross income for the year is US$114,600. This amount represents his earnings before any deductions or taxes are applied.

Example of business gross income

Now, let’s look at XYZ Enterprises, a fictitious company specializing in eco-friendly products:

• Total revenue from product sales: US$1,200,000
• Revenue from consulting services: $250,000

The costs of goods sold -include:

• Manufacturing costs: $400,000
• Packaging and shipping expenses: $60,000
• Quality control costs: $80,000

To determine XYZ Enterprises’ gross income:

• Total Revenue = Product Sales + Consulting Services
• Total Revenue = $1,200,000 + $250,000 = $1,450,000
• Total COGS = Manufacturing Costs + Packaging Expenses + Quality Control Costs
• Total COGS = $400,000 + $60,000 + $80,000 = $540,000
• Gross Income = Total Revenue - COGS
• Gross Income = $1,450,000 - $540,000 = $910,000

XYZ Enterprises’ gross income for the year is US$910,000. This figure shows the company’s profit before accounting for additional operating expenses, taxes, and other deductions.

Key takeaways

• Individual gross income includes all earnings before any deductions are taken out.
• Business gross income (or gross profit) is figured by subtracting the cost of goods sold from total revenue.
• Gross income is a vital starting point for analyzing personal finances and business performance.
• For international businesses, it’s essential to factor in currency exchange rates when calculating gross income from different countries.

FAQs

Below are answers to common questions related to gross income.

What is Modified Adjusted Gross Income?

Modified adjusted gross income (MAGI) starts with your adjusted gross income (AGI) and then adds back certain deductions. This metric helps determine whether you qualify for various tax benefits and programs, such as retirement fund contribution limits or health insurance subsidies. Keep in mind that MAGI can vary depending on the specific program, as different benefits might add back different deductions.

What is gross and net profit?

Gross profit is revenue minus the cost of goods sold. Net profit, on the other hand, is the amount left after subtracting all other business expenses, including operating costs, taxes, and interest. Gross profit helps gauge a company's efficiency, while net profit shows the overall profitability after all expenses.

Is earned income gross or net?

Earned income generally refers to your gross income, such as wages, salaries, tips, and other taxable compensation, before removing any taxes or deductions. This metric is the starting point for calculating taxable income and is foundational for tax planning and financial management.

Do you pay taxes on gross or net income?

You pay taxes based on your taxable income, which is your gross income after deductions and adjustments. So, while the tax process begins with your gross income, your final tax bill is based on your taxable income. Understanding this can help you plan better and ensure payroll compliance, especially with international tax rules.

Is household income gross or net?

Household income typically refers to the combined gross income of everyone in one household or family unit. Gross income is used rather than net income for most financial and tax purposes. Household income is relevant for things like applying for loans or government assistance, as it provides a fuller picture of your household's financial resources.

Disclaimer: The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. © 2024 Velocity Global, LLC. All rights reserved.