What Is Gross Income?
Gross income is the amount of money you earn, typically on a paycheck, before payroll taxes and other deductions are taken out. Gross annual income is the total amount you earn in a year before deductions and taxes.
The gross income on a pay stub would be your hourly wage multiplied by hours worked. You'll also see your year's gross wages on the W-2 form you receive from your employer at tax time. Say your gross wages for a week were $800. However, you take home only $675 in net income or the remainder of your gross income after taxes and other deductions. That's why gross income is also sometimes called pre-tax income.
From the perspective of the Internal Revenue Service (IRS), gross income includes the total amount of income from all sources, which you must report on your income tax return.
Sources of Income
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
You may also have income from other sources not on this list. Perhaps you rent out a room in your home on a website like Airbnb. Or you might collect royalties from intellectual property or oil, gas, or mineral rights. You might even have gambling or lottery winnings to declare.
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.
What Reduces Gross Income
After you've tallied up all your sources of income to find your gross income, you can see how it may be reduced by expenses and deductions. Your gross income may be reduced by many things:
- Certain business expenses such as materials, gas mileage, or equipment rental fees
- Some moving 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
Reducing your gross income reduces the amount of tax you owe.
Adjusted Gross Income (AGI)
Reductions to your gross income result in Adjusted Gross Income (AGI). Your adjusted gross income is your gross income minus certain tax deductions and credits that are allowable whether or not you itemize deductions on your tax return.
Adjusted Gross Income is figured on the first page of your U.S. federal tax return, and serves as the basis for the income tax you owe. If you're doing your taxes, you can use tax software to calculate AGI automatically and to accurately do other tax calculations as the software takes you through its tax questionnaire interview.
Net income refers to your take-home pay. It's the amount of your paycheck you receive after payroll withholding, which includes state and federal income taxes, Social Security taxes, and pre-tax benefits such as health insurance premiums. If you are enrolled in a flexible spending account to pay for medical costs, the amount withheld from each check is on a pre-tax basis.
If you want to track your personal net income, financial software can help you calculate it and keep a running total. To find your net income, you would record your income in the software's account register as a split transaction, record gross pay and then separately record the taxes and pre-tax deductions found on your paycheck stub. Your financial software can generate reports that calculate your net income based on these records.
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IRS.gov. "Publication 969 (2019), Health Savings Accounts and Other Tax-Favored Health Plans." Accessed March 18, 2020.
IRS.gov. "Publication 525 (2019), Taxable and Nontaxable Income." Accessed March 18, 2020.
IRS.gov. "Self-Employment Tax (Social Security and Medicare Taxes)." Accessed March 18, 2020.
IRS.gov. "SIMPLE IRA Plan FAQs." Accessed March 18, 2020.
IRS.gov. "Lowering AGI This Year Can Help Taxpayers When They File Next Year." Accessed March 18, 2020.
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