Definition and Examples of Gross Income
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.
For example, suppose your gross wages for a week are $800. However, you take home only $675 in net income, which is the remainder of your income after taxes and other deductions.
- Alternate names: Pre-tax income, before-tax income
How Gross Income Works
If you're paid a salary, that's your gross income. Bonuses also count as 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:
- Side jobs, such as driving for Uber or Lyft
- 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
- 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.
It's important to report all of your earned income when you file your income taxes, even side income not reported on Form 1099s. And even if you have no income, it still may be wise to file a tax return.
Gross Income vs. Net Income
|Gross Income||Net Income|
|Your total income||Your income minus taxes and deductions|
|Your actual pay||Your take-home pay|
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. Your gross income can be reduced 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 your adjusted gross income (AGI), which serves as the basis for your income taxes.
- Gross income is the amount of money you earn before any taxes or other deductions are taken out.
- It impacts how much someone can borrow for a home, and it's also used to determine your federal and state income taxes.
- Your gross income can be from a salary, hourly wages, tips, freelancing, and many other sources.
- Your net income is your income after taxes and other deductions have been withheld. It's also known as "take-home pay."
- Your adjusted gross income (AGI) is your gross income less above-the-line deductions like student loan interest. This is the basis for your income taxes.
Internal Revenue Service. "Taxable and Nontaxable Income," Page 27. Accessed Nov. 24, 2021.
Internal Revenue Service. "Schedule 1—Additional Income and Adjustments to Income." Accessed Nov. 24, 2021.