What Is Gross Income and How Does It Differ From Net Income?

Gross income includes all earnings before deductions, while net income is what remains after taxes and expenses. Understanding these figures helps determine tax obligations, loan eligibility, and overall financial health.

By Douglas Wade, Attorney

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Table of Contents

1. What is the definition of gross income?

2. Understanding gross income

3. Gross income examples

4. Why knowing gross income matters

5. A Brief Comparison of Net Income and Adjusted Gross Income

6. How Does Net Income Work?

7. Businesses’ Net Income

8. Differences Between Net Income and AGI

9. Is There a Difference Between Adjusted Gross Income and Gross Income?

10. Is Gross Income or Net Income Higher?

11. What Does Annual Net Income Mean?

12. The Bottom Line

What is the definition of gross income?

A person’s pre-tax gross income includes all of their earned money, including salary, tips, investment profits, and interest. After deducting taxes, the remaining amount is known as net income. Take a pay stub as an example; it shows your net income (your money left over after taxes and withholdings) and your gross income (your total compensation before those deductions). With the exception of those who are exempt from paying taxes and who do not deduct any expenses, net income is always less than gross income.

Knowing your gross income and how it is determined is crucial as it determines the rate at which you will be taxed by both the federal government and individual states.

Understanding gross income

A paycheck, which may consist of a mix of commissions, bonuses, hourly wages, and salaries, is often the primary source of gross income for most people. A person’s gross income can come from a variety of sources, not only wages:

Various forms of payment for services provided
Capital gains
Business income
Money won from gambling
Dividends
Income from discharged debt
Gas, oil, or mineral rights
Earnings from a person’s estate or trust (generally, a beneficiary’s inherited assets are not regarded as income, but there are situations where an heir may be required to pay inheritance tax)
Pensions and other retirement income
Interest from bank accounts, certificates of deposit (CDs), etc.
Royalties
Rental revenue
Selling things in person or online
Self-employment income
Tips

Revenue from the aforementioned sources is liable to taxation; however, alimony, bequests, income from municipal or state bonds, payments for workers’ compensation, and life insurance proceeds are typically not taxable.

Your paycheck is subject to withholding by your employer for federal, state, and Medicare taxes as well as Social Security and state income taxes. At the same time, paying one’s fair share of taxes on one’s gross income is the duty of company owners, self-employed individuals, independent contractors, and freelancers.

To find a company’s gross income, add up all of its sales revenue and then subtract the cost of goods sold (COGS).

Gross income examples

1. An individual’s gross income might look like this on a weekly basis:

$675.00 after 45 hours at $15/hour

Bonus: $500

Commission: $150

A total of $1,325 in weekly gross income

2. A taxpayer’s gross income might look something like this on a yearly basis:

Pay: $55,000 per annum

Bonus for the year: $5,000

Income from rentals: $10,000

Interest: $675

Dividends from stocks: $500

Earnings from a side gig: $10,000

Online product sales: $1,300

Gross income for the year: $82,475

3. A company’s yearly gross income may appear like this:

Revenue totaling $275,000

Cost of goods sold: $200,000

Gross revenue for the year: $75,000

Why knowing gross income matters

Knowing your gross income is the first step in determining your tax liability, so it’s a crucial concept to grasp. Your tax bracket is determined by your adjusted gross income, which is your gross income minus specific adjustments. Your filing status determines how this number is applied.

Among the seven federal income tax brackets, the rates for 2024 and 2025 are as follows: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. You may also be exempt from filing taxes if your annual income is below a specific level.

The amount that a lender is willing to lend you for a loan, such as a mortgage or car loan, is often based on your gross income. Lenders look at borrowers’ debt-to-income ratios (DTIs) to figure out how much money to give them. To find the DTI, take the monthly gross income and divide it by the monthly debt payments.

Lenders will be hesitant to lend money to someone with a high DTI, and if they do, the interest rate will be higher. Although a DTI of no more than 35% is considered ideal, there are lenders who will extend credit with a DTI of up to 50%.

A Brief Comparison of Net Income and Adjusted Gross Income

Whether you’re putting together your taxes, looking at your take-home pay, or assessing the profitability of a company, knowing the difference between net income and adjusted gross income (AGI) can be vital for proficient financial management. Both concepts have to do with money coming in, but there are major distinctions between them, particularly in tax matters.

Gross income is the sum of all of your income for a given year and is the starting point for all other types of income. That encompasses not only base pay but also incentive pay, interest, capital gains, and bonuses.

This is not the same as the money we get from work and put in the bank. To get to our net income, or take-home pay, we have to subtract taxes and other deductions from our gross income.

Income before taxes (GST) is also the basis for adjusted gross income (AGI). Taxes are due after a reduction of gross income that takes into account adjustments permitted by the Internal Revenue Service (IRS).

One kind of adjustment is the amount of money put into standard 401(k) retirement accounts. Donations like these lower one’s taxable income and one’s tax liability.

How Does Net Income Work?

The term “net income” refers to the sum that remains after deducting all expenses from one’s gross income. This is the sum that really makes it into your checking or savings account.

The following are examples of common tax deductions that reduce your taxable income and modify your net income:

Taxes at all levels: federal, state, municipal, Medicare, and Social Security.

Before taxes: Paying for medical and dental coverage, contributions to retirement plans (such as 401(k)s) and FSAs

By lowering your gross income, these deductions also lower the amount of taxes that are deducted from your paycheck. Your net income is the amount that remains after taxes.

Businesses’ Net Income

A company’s net income is its profit remaining after deducting all operating expenses from its gross revenue. You can find it on their financial statements; other names for it include net profit and after-tax income.

A business, like an individual, can calculate its net income by taking its gross earnings (revenue or sales) and subtracting specific amounts.

Important costs that lower a company’s profit from sales include:

Cost of goods sold (COGS)
Interest expenses
Operating expenses
Taxes

Differences Between Net Income and AGI

Everyone and every company uses net income. “Net income” means a person’s money remaining after taxes and other deductions. “Net income” is the amount a company keeps after paying all of its bills and taxes.

An individual’s adjusted gross income (AGI) is determined by deducting specific amounts from their gross income that have been approved by the Internal Revenue Service (IRS). The calculation of taxable income and the determination of tax credit eligibility depend on it.

As an independent contractor or sole proprietor, you are required to report your business’s profit and loss on Schedule C, which is an attachment to Form 1040.

Is There a Difference Between Adjusted Gross Income and Gross Income?

Gains from investments, salaries, bonuses, and interest are all a part of a person’s gross income. You can take certain deductions from your gross income to get your AGI. You may be able to pay less in taxes if you reduce your gross income to adjusted gross income (AGI). Examples of deductible expenses include interest on student loans and teacher expenses.

Is Gross Income or Net Income Higher?

Net income is always less than gross income. Net income is the amount that stays after all deductions, such as taxes and benefits, are taken out. Gross income is the combined amount of all income prior to deductions.

What Does Annual Net Income Mean?

Your take-home pay each year after deducting all necessary expenses (such as healthcare, taxes, and retirement contributions) is called your annual net income.

The Bottom Line

The two most important numbers for figuring out your finances are your net income and your adjusted gross income. AGI is used to calculate your tax liability and eligibility for specific credits and deductions, whereas net income is what you keep after deductions.

It’s important to know both numbers when you do your taxes. To determine your tax liability, use your adjusted gross income (AGI), and to find out how much of your paycheck you will keep, use your net income.

Have a quick question? We answered nearly 2000 FAQs.

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