Gross Income Explained in 600 Words or Less

Are you an employee or a business owner? If you're earning money from your job or business, you have an income. In the third quarter of 2018, the median weekly earnings for full-time U.S. workers was $887.

This equates to just around $44,350 in earnings per year, not adjusted for taxes or any other deductions. But what's the term to describe income before any taxes or deductions have been subtracted? The answer: gross income.

Next, we'll define gross income and learn what it means for individuals and businesses.

The wage or salary you receive, before taxes and deductions, is known as gross income. Gross income can be broken down by different time periods. For example, you could look at gross income at an annual or monthly rate.

Gross Annual Income

Gross annual income is the monetary amount an individual makes each year before deductions and taxes are taken out. For example, when you receive a job offer from an employer, the gross annual income is the amount listed on your offer letter or employment contract.

Now that we've described gross annual income, let's take a look at gross monthly income.

Gross Monthly Income

Gross monthly income is the amount of money an individual earns each month before taxes or deductions are subtracted. Your gross monthly income can be calculated with the following formula:

Gross monthly income = Annual income / 12 months

Gross monthly income is often used by lenders and credit card companies when determining if you qualify for an offer and how much the offer should be.

Let's dig into the difference between gross income and net income.

Here's an example to illustrate the difference between gross and net income. Let's say a person earned $1,500 and there were $400 in deductions -- their gross income is $1,500 and net income is $1,100.

For individuals, knowing your net income is helpful for budgeting. 

For businesses and organizations, net income (also called net earnings) is a figure used when evaluating revenue vs. expenses. This analysis gives a good picture of the financial health of an organization, which is important not just for the leadership team but also lenders and investors.

What Is Adjusted Gross Income?

Adjusted gross income (AGI) is the amount of money you've earned throughout the year from your job, self-employment, dividends, or interest from a bank account, minus adjustments like IRA contributions, alimony payments, tuition, and more. AGI is used during the tax preparation process.

Adjusted gross income is used as a starting point for calculating your taxes. It's how much money you've earned in a year minus adjustments that include the following:

• Alimony payments
• IRA or retirement plan contributions
• Student loan payments
• Self-employed health insurance payments
• Tuition and fees

Depending on how you're filing your taxes, you might need to use your modified adjusted gross income instead. Modified adjusted gross income (MAGI) is your AGI with certain deductions added back.

Gross Income for a Business

Gross income for individuals and businesses are a bit different. For a business, gross income, or gross margin, is calculated by subtracting the cost of goods sold from the business' sales. Cost of goods sold is the expense of creating the product (e.g., labor costs and raw materials). And sales refers to the monetary amount a business has after selling its products or services.

Whether you're looking at your individual gross income or the gross income of your business, understanding your income is essential -- especially when filling out tax forms and creating a budget. 

Editor's note: This post was originally published in January 2019 and has been updated for comprehensiveness.