What is gross income?

Gross income is the total amount of money earned over a set period of time before deductions are made. 

Key takeaways

Understanding gross income

For an individual, gross income is their income without any money deducted, for tax, national insurance etc. Gross income can include salary and other income streams, such as rental income, interest, alimony, pensions and dividends.

Annual gross income is the sum of money an individual receives from all sources in a 12-month term before taxes. This is often the employment salary advertised by businesses when recruiting.

When it comes to companies, gross income can also be referred to as gross margin or gross product. This is the sum of the business’ gross revenue – the overall amount of money it receives over a set time period – minus the cost of goods sold, which is the direct cost of making its product and delivering its services. This usually includes the cost of the workforce employed and materials used to manufacture the product or deliver the service.

Gross income can be used for many things. For an individual, the gross income is the starting point for calculating how much tax they should pay. It can also be used when it comes to applying for loans, as it can help a lender decide how much money they can afford to lend.

For example, if a landlord is looking to lease a property, gross income can help them decide whether or not the prospective tenant will be able to afford to pay the rent.

For a business, gross income can be used to see how much money the company as a whole is making after the cost of goods sold, while it can also be filtered down to cover things like individual departments and individual products to see how much money they potentially bring in. 

Calculating gross income

To understand how to calculate gross income for a company, you can use the following formula:

For individuals, you simply have to take all forms of income and add them together.

Gross income vs net income

Net revenue for an individual is the sum total of their income minus deductions, such as pensions, national insurance, student loan repayments and taxes. It is also known as take home pay, although individuals may have expenses related to their work that are not covered by the usual deductions and may not be imbursed by their company.

For companies, net income is the total revenue minus all expenses. As well as the cost of goods sold, net income also subtracts the cost of things like tax, the cost of selling, any interest on loans and any general and administrative costs. 

Gross margin examples

In terms of some gross income examples, let’s look at one for an individual and one for a company. 

For an individual, if they had a salary of $50,000, but also received dividends of $1,000 and rental income of $6,000, then their gross income would be $57,000.

If a company reports $500,000 of annual revenue and $200,000 in cost of goods sold, its annual gross income would be $300,000.

Conclusion

In conclusion, gross income is a term that can mean something slightly different depending on whether we are talking about an individual or a company. For an individual, it is the sum total of all their income before any deductions are made. For a company it is the total revenue minus the cost of goods sold. Gross income can be a useful tool if we want to either find out whether someone might be creditworthy, or the potential overall financial shape of a company. 

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