Gross Income

Gross income is the total amount of earnings received before any taxes, deductions, or other adjustments. For individuals, it’s often shown as gross pay on a paycheck. For businesses, gross income (also called gross profit or gross margin) is revenue minus the direct costs of producing goods or services.

Definition — Individual vs. Business

• Individual: All earnings from wages, salary, tips, interest, dividends, rental income, alimony (where applicable), pensions, and certain capital gains—before tax and other deductions. Lenders and landlords commonly use gross income as an underwriting metric.
• Business: Total revenue less cost of goods sold (COGS). This measures how much a company earns from its core production or service activities before operating, administrative, tax, interest, and other expenses.

How Gross Income Works

• Individuals: Gross income is the starting point on tax returns. After subtracting allowed “above-the-line” deductions, gross income becomes adjusted gross income (AGI); further deductions and exemptions produce taxable income. Lenders may ask for gross income or AGI to evaluate creditworthiness.
• Businesses: Gross income isolates production profitability. It excludes indirect costs (selling, general and administrative expenses, R&D, taxes, interest), making it useful for comparing product or segment performance and operational efficiency.

How to Calculate

Individual gross income:
– Sum all income sources received before deductions:
* Wages and salary
* Tips
* Interest and dividends
* Rental income
* Capital gains
* Retirement and pension distributions
* Other income items required to be reported

Note: Some items are nontaxable but may still be counted by lenders (e.g., certain Social Security benefits, some gifts, life insurance proceeds, municipal bond interest).

Business gross income:
– Formula:
Gross Income = Gross Revenue − Cost of Goods Sold (COGS)
– Often expressed in absolute dollars (gross profit) or as a percentage (gross profit margin).

Important: Gross income includes direct costs tied to creating goods/services but excludes selling, administrative, tax, interest, and other operating expenses.

Examples

Individual example:
– Salary: $75,000
– Interest: $1,000
– Dividends: $500
– Rental income: $10,000
– Annual gross income = $75,000 + $1,000 + $500 + $10,000 = $86,500
– Monthly gross income ≈ $7,208
– If the taxpayer has a $500 above-the-line deduction (e.g., student loan interest), AGI = $86,000.

Business example:
– If a company reports $89.5 billion in net sales and has $48.6 billion in COGS, gross income = $89.5B − $48.6B = $40.9B (gross profit). Operating expenses, taxes and other costs are not included in this figure.

Gross Income vs. Net Income

• Gross income: Revenue minus direct production costs (COGS). It shows how efficiently core activities generate profit.
• Net income: Revenue minus all expenses (COGS, operating expenses, taxes, interest). It represents the final profit (take-home pay for individuals; “bottom line” for businesses).
  Gross income is a higher-level measure focused on production; net income reflects the overall financial result after every cost.

Common Uses

• Tax reporting: Starting point for AGI and taxable income calculations.
• Lending and renting: Used to assess ability to repay or pay rent.
• Business analysis: Evaluates product or segment profitability and operational efficiency, and facilitates comparisons between companies or product lines.

FAQs

Q: Does gross income include tax payments?
A: No. Gross income is calculated before taxes are deducted.

Q: Do lenders count nontaxable income when determining gross income?
A: Some lenders may include certain nontaxable items (e.g., some Social Security benefits, gifts) when assessing total income. Requirements vary by lender.

Q: Is gross profit the same as gross margin?
A: Gross profit is the dollar amount (revenue − COGS). Gross margin often refers to gross profit as a percentage of revenue (gross profit margin).

Bottom Line

Gross income is the total earnings before deductions—used differently for individuals and businesses. For individuals it’s the basis for tax calculations and credit assessments. For businesses it isolates the profitability of core goods and services by subtracting only direct production costs. Understanding gross income helps evaluate earning power and compare operational performance.