What Is Gross Income?

How Gross Income Works

Gross income is the amount of money you earn, typically in a paycheck, before payroll taxes and other deductions are taken out. It impacts how much you can borrow for a home, and it's also used to determine your federal and state income taxes.

• Alternate names: Pre-tax income, before-tax income, salary

If you're paid a salary, that's your gross income. Bonuses also count toward gross income. If you're an hourly worker, the gross income on a pay stub is your hourly wage multiplied by hours worked. Gross wages are also on the W-2 forms received from employers at tax time.

Your total gross income can come from many sources in addition to a W-2 job. For example, you may also have income from:

• Freelancing
• Side jobs, such as driving for Uber or Lyft
• Consulting
• Tips
• Self-employment
• Selling goods on eBay, Etsy, Craigslist, or other online storefronts
• Selling items at a swap meet, craft fair, or other venues
• Rental property income
• Interest, dividends, and capital gains from investments
• Alimony
• Royalties
• Oil, gas, or mineral rights
• Gambling or lottery winnings

Some types of income don't need to be reported on your income tax return, because you won't owe taxes on them. That includes certain types of income from state and municipal bonds, some Social Security benefits, certain inheritances and gifts, and some life insurance payouts. 

Examples of Gross Income

Let's say you are an employee at a clothing store in the mall. You're paid on an hourly basis. You earn $15 per hour and work 20 hours per week. Your gross weekly income is $300 ($15 x 20). You work 50 weeks per year. Your annual gross income is $15,000. This is the amount you earn before any taxes are taken out of your paycheck.

After two weeks of work, you receive a paycheck. If you earn $300 per week, your gross income for two weeks would be $600. However, because of taxes, your paycheck is less than $600. This is your net income and the amount you can actually take home. It may be closer to $500 or $400, depending on factors like the state you live in and if you contribute any money to a retirement account.

Here's another example. You are a marketing coordinator and earn a salary of $50,000 per year. This is your gross income. After retirement contributions and taxes, your total net income for the year is less than $50,000. This lower amount is your take-home pay and it is divided into 26 paychecks per year, paid to you every other Friday. It's not based on the hours you work because it's a flat salary rate that you agreed to when you were hired at the company.

Now here is a third example. You're a marketing coordinator earning a salary of $50,000. You also have a side hustle where you make and sell pillows online. You earn $500 per month from your pillow business. At the end of the year, your gross income is the combination of your pillow business income before taxes and expenses ($6,000) and your marketing coordinator salary ($50,000). Your gross income is $56,000 for the year.

Gross Income vs. Net Income

Your gross income is the total of all your income. It's larger than your net income, which is your income after taxes and other deductions have been withheld. Employers are required to withhold state and federal income taxes, Social Security taxes, and Medicare taxes. They also withhold benefits you've elected, like health insurance premiums and contributions to a flexible spending account or health savings account.

Your net income is what you'll use for budgeting. It's the pay that's yours to spend. If you're self-employed or an independent contractor, you're paid gross income. You'll need to set aside money for taxes yourself since there's no employer to deduct it on your behalf. An accountant can help you determine how much to set aside, and you may have to file quarterly estimated taxes.

Adjusted Gross Income (AGI)

After you've tallied up all of your sources of income to find your gross income, you can see how expenses and deductions can reduce it, which in turn reduces your tax burden. This is known as your adjusted gross income.

Your gross income can be adjusted by:

• Certain business expenses, such as materials, gas mileage, or equipment rental fees
• Educator expenses
• Student loan interest (with some qualifications)
• Contributions to certain retirement accounts
• Penalties from financial institutions for early withdrawal of savings
• Health savings account (HSA) deductions
• Jury duty pay sent directly to the juror's employer
• Alimony paid
• Deduction for half the self-employment tax
• SEP-IRA, SIMPLE IRA, and 401(k) deductions for the self-employed

Your income after these adjustments to income is called your adjusted gross income (AGI), which serves as the basis for what you'll pay (or receive back) come tax season.

Frequently Asked Questions (FAQs)