What Is Gross Income?
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Gross income is the total amount of pay a person receives in their paycheck before any deductions or taxes are taken out.
Gross income can also be referred to as pretax or before-tax income.
Gross income examples
Your gross income is the amount of money you earn before anything is taken out for taxes or other deductions. For example, even though your monthly salary might be $3,500, you might only receive a check for $2,500. In that case, your net income would be $2,500, but your gross income is $3,500.
How do I calculate my gross income?
Figuring out your gross monthly income depends on whether you’re on a salaried or hourly payment system.
If you’re on an annual salary
To figure out your gross monthly income from your annual salary, simply divide that salary by 12, since there are 12 months in a year.
Gross monthly income ＝ Annual salary ➗ 12
If you’re paid hourly
To figure out your gross monthly income from your hourly rate, first figure out how much you’re paid per week. How many hours do you work in an average week? Multiply the number of hours you work in a week by your hourly pay to figure out how much you make each week.
Weekly salary = Hours per week x Hourly pay rate
Then, multiply that number by 50 weeks to get your annual income.
Annual salary = Weekly salary x 50 work weeks in a year
Then, divide it by 12 to get your gross monthly income.
Gross monthly income = Annual salary / 12
Significance of gross income
Gross income is often used by lenders as a guideline for how much they will let you borrow, such as when you're applying for a mortgage. For example, according to Bankrate.com, most lenders won't let you borrow more than 28 percent of your gross income.
However, when you're figuring out your personal budget, make sure you don't spend more than your net income. Using budgeting software like Quicken can help you keep your spending in line with your income.
Major paycheck deductions
Your gross income has several deductions taken out for a number of taxes before you get your hands on your paycheck.
These include federal and state income taxes, which vary depending on how much money you make, and the FICA taxes — Social Security and Medicare — which are fixed percentages of your income.
Depending on where you live, you might also have to pay local taxes. For example, if you work in Kansas City, an extra 1 percent of your gross income is taken out to cover the earnings tax.
Why are payroll taxes so high, and where do they go?
Federal, state, and local taxes pay for everything from ensuring America’s security to paving the roads we drive on.
Social Security and Medicare taxes fund one of the most important US systems in making sure American workers can afford to retire. Some 85% of Americans depend on Social Security for retirement income and on Medicare for healthcare costs by the time they reach the age of 65.
- Keep your finances organized
- Stay up to date
- Plan & save for the future
Other pretax deductions
You may also have other amounts taken out of your gross income before you receive a check, depending on the benefits your employer offers.
Contributions to your retirement plan, such as a 401(k) or 403(b), also come out of your gross income.
Other sources of gross income
Though it might be only a small amount, you may have more gross income than just your paycheck. According to the Internal Revenue Code, your gross income also includes things like tips, money you make from side gigs, and even the interest earned on your bank account before taxes are taken out.
For example, if you make $100 in interest from your savings account, that's an extra $100 added to your gross income.
Gross income vs. adjusted gross income (AGI): What’s the difference?
In a nutshell, your gross income is all the money you make personally in a given year. However, people don’t pay taxes on every dime they make. There are plenty of tax deductions and adjustments that reduce the effective amount of income you’re actually taxed on.
After those deductions and adjustments are subtracted from your actual income to calculate your taxable income, that taxable income amount is called your adjusted gross income, or AGI.