What Is Gross Income? Definition, Formula and Examples

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Gross income is the total amount earned before taxes, deductions or expenses are subtracted. For an individual, it means all income received in a period, including wages, tips, interest, dividends and rent, and it can include property or services received as well as cash. For a business, gross income means something narrower: revenue minus the cost of goods sold (COGS). The same term sits at the top of a pay stub, on the first lines of a tax return and partway down a company’s income statement, and its meaning changes with each setting.

What Is Gross Income?

In personal finance, gross income answers one question: how much came in before anything was taken out. Income tax, Social Security and Medicare withholding, retirement contributions and health insurance premiums are subtracted later. Gross income does not count spending at all, so rent, car payments and groceries play no part in it.

On a paycheck the employer’s portion is usually labeled gross pay, and the amount actually deposited is net pay. Gross pay covers only that job. A person’s total gross income also includes other sources, such as investment returns, rental income, freelance work, pensions and, in some cases, alimony.

U.S. tax law defines the term broadly. Section 61 of the Internal Revenue Code describes gross income as “all income from whatever source derived,” unless a specific provision excludes it. This is why bartered services or property received as payment can count, even though no cash changed hands.

How Gross Income Works

Gross Income for Individuals

For a salaried employee, the main figure is the annual salary before withholding. An hourly worker multiplies hours worked by the hourly rate and adds overtime, bonuses and tips. Other income is added on top:

• Interest from savings accounts, CDs and bonds
• Dividends from stocks and funds
• Capital gains from selling investments (see how capital gains are taxed)
• Rental income
• Self-employment or freelance earnings
• Pension and annuity payments
• Alimony received under divorce or separation agreements executed before 2019 (later agreements generally make alimony neither taxable to the recipient nor deductible by the payer)

For tax purposes, some money is excluded from gross income even though the person received it. Common examples include life insurance proceeds paid because of the insured person’s death, gifts and inheritances, interest on most state and municipal bonds, and part or all of Social Security benefits depending on the recipient’s other income. The IRS lists taxable and nontaxable items in Publication 525.

For non-tax purposes, such as a mortgage or apartment application, the definition can be looser. A lender may count nontaxable income, such as Social Security benefits, when it judges ability to pay. Some lenders also ask for AGI from a tax return so they can measure income on a consistent basis.

Self-employed people use something closer to the business definition. On Schedule C, a sole proprietor starts with gross receipts, subtracts returns, allowances and cost of goods sold, and the result is labeled gross income. Business expenses such as advertising, supplies and a home office come off after that.

Gross Income for Businesses

Some income statements show gross income (or gross profit) as its own line. Otherwise it is calculated as revenue minus cost of goods sold.

COGS includes the direct costs of the product or service: raw materials, direct labor, manufacturing overhead and the purchase cost of inventory that was resold. It excludes selling expenses, general and administrative costs such as office rent and executive salaries, research and development, interest and income taxes. Those all appear further down the statement, between gross income and net income.

Because only direct costs are subtracted, gross income isolates how well the product or service itself makes money. A company can calculate it for the whole business or for a single product line, provided its chart of accounts tracks revenue and direct costs by product. This also makes gross income useful for comparing companies with very different overhead structures.

The Gross Income Formula

For an individual:

Gross income = wages or salary + tips and bonuses + interest + dividends + rental income + capital gains + other taxable or countable income

For a business:

Gross income = gross revenue − cost of goods sold

A related business measure turns that dollar amount into a percentage:

Gross profit margin = gross income ÷ revenue × 100

The margin lets companies of very different sizes be compared. A $2 million gross income on $5 million of revenue (40%) reflects more efficient production than $2 million on $10 million (20%).

Annual vs. Monthly Gross Income

Gross income has no default period. “Annual gross income” or “gross yearly income” covers 12 months. “Gross monthly income” covers one month and is the version lenders and landlords usually ask for. Converting between them depends on how the person is paid:

• Annual salary: divide by 12.
• Hourly pay: hourly rate × weekly hours × 52 weeks ÷ 12. A worker earning $25 an hour for 40 hours a week has annual gross income from that job of $52,000 and gross monthly income of about $4,333 (assuming a full year of work and no overtime).
• Biweekly paychecks: gross pay per check × 26 ÷ 12. Multiplying one paycheck by two understates monthly income, because a year has 26 biweekly pay periods, not 24.
• Irregular income (commissions, freelancing, seasonal work): applicants often average past earnings over a period such as the last 12 or 24 months, since a single month can be unrepresentative.

Year-end documents show annual figures for the past year. Form W-2 reports wages from an employer, and Forms 1099 report other income such as interest, dividends and nonemployee compensation. Box 1 of a W-2 shows wages after certain pre-tax deductions, such as traditional 401(k) contributions and pre-tax health premiums. It can therefore be lower than the gross pay shown on pay stubs.

Example of Gross Income for an Individual

Hypothetical example. Maria earns a $68,000 salary. During the year she also receives $600 in savings account interest, $900 in stock dividends and $9,000 from renting out a condo.

• Annual gross income: $68,000 + $600 + $900 + $9,000 = $78,500
• Gross monthly income: $78,500 ÷ 12 ≈ $6,542

Maria’s monthly payments of $1,600 in rent, $400 toward student loans and $350 on a car loan do not reduce her gross income.

For her federal tax return, Maria paid $1,200 in student loan interest during the year. Student loan interest is an above-the-line deduction, capped at $2,500 and subject to income limits. Subtracting it from her gross income gives an AGI of $78,500 − $1,200 = $77,300. That AGI, not her gross income, is used to work out her standard or itemized deductions, taxable income and eligibility for many credits. (This example treats the $9,000 of rental income as a simple total. On an actual return, rental expenses are reported on a separate schedule and the net amount flows through.)

Example of Gross Income for a Business

Hypothetical example. A furniture maker reports $1,200,000 in sales for the year. Lumber, hardware, finishing materials and the wages of the workshop staff total $720,000, which is its cost of goods sold.

• Gross income: $1,200,000 − $720,000 = $480,000
• Gross profit margin: $480,000 ÷ $1,200,000 = 40%

The company also spends $300,000 on showroom rent, marketing and office salaries, $30,000 on interest and $35,000 on income taxes. Subtracting them from gross income leaves net income of $480,000 − $300,000 − $30,000 − $35,000 = $115,000.

The 40% gross margin shows the furniture is priced well above what it costs to build. The much smaller net income shows how much of that margin goes to overhead, financing and taxes.

How Gross Income Is Used

Taxes. On a U.S. federal return, gross income is the first total calculated. Adjustments to income (above-the-line deductions such as deductible traditional IRA contributions, HSA contributions, educator expenses and student loan interest) reduce it to AGI. The standard deduction or itemized deductions then reduce AGI to taxable income. Some programs use a further variant, modified adjusted gross income (MAGI), which adds certain items back to AGI to test eligibility for things like Roth IRA contributions and premium tax credits.

Borrowing. A debt-to-income (DTI) ratio divides total monthly debt payments by gross monthly income. Someone with $2,000 in monthly debt payments and $6,000 in gross monthly income has a DTI of about 33%. Lenders compare that ratio with their own limits when approving mortgages, auto loans and personal loans. Because it uses gross income, the ratio can look more comfortable than the borrower’s take-home pay would suggest.

Renting. Landlords and property managers often ask for proof of gross income, such as pay stubs, a W-2 or tax returns. Some set a minimum income as a multiple of monthly rent.

Gross Income vs. Related Terms

Gross income vs. net income. For an individual, net income usually means take-home pay: gross pay minus taxes, retirement contributions and other payroll deductions. In a household budget, people sometimes also use it for what remains after all personal expenses are paid. For a business, net income is revenue minus every expense: COGS, operating costs, interest, taxes and other items. Gross income stops after COGS.

Gross income vs. taxable income. Taxable income is AGI minus the standard or itemized deductions (and certain other deductions). It is the amount tax brackets apply to, and it is often far below gross income.

Gross pay vs. gross income. Gross pay is the pre-deduction amount from a single job for a single pay period. Gross income combines all sources over the whole period being measured.

Gross revenue vs. gross income (business). Revenue, or “top line” sales, comes before COGS is subtracted. Gross income comes after.

Limitations of Gross Income

Gross income overstates spending power. Two people with identical gross incomes can take home very different amounts, depending on their state’s income tax, their retirement contributions, their health plan costs and their filing status.

The figure also depends on who is asking. The IRS excludes certain items, a lender may count nontaxable benefits, and a business uses a different formula, so a number from one context may not match what another form requires.

For self-employed people and businesses, gross income still includes overhead that must be paid, so a high gross income can sit alongside modest net earnings.

FAQs

The Bottom Line

Gross income matters to anyone filing a federal return, applying for a loan or lease, or reading a company's income statement. Always state the period and the context, since the IRS, lenders and businesses each define the figure differently. Because it ignores taxes, payroll deductions and overhead, check take-home pay or net income before judging how much money is actually available.