What Is Gross Income + Why Is It Important?

Gross income is the money you earned before taxes and deductions are removed.

Do you remember your first introduction to gross income? It could’ve been the first paycheck you received for your high school job. You were so excited to see a fortune; however, the take-home pay turned out to be much less than you anticipated.

Flash-forward to now – knowing how gross income works will make a difference when you save up for your first home purchase. 

Key Takeaways:

• Gross income is your income before taxes and other deductions.
• Gross income comes from your paycheck, interest, rental income and other sources.
• Net income is your income after taxes and other deductions are subtracted.

Table Of Contents

How Does Gross Income Work?

How To Calculate Total Gross Income And Examples

Gross Income Vs. Net Income

What Is Adjusted Gross Income?

Gross income is an individual’s total earnings before taxes or other deductions are withdrawn. Gross income doesn’t only come from your pay stub, but from all sources of income, including bonuses, rental income and savings account interest.

Gross income can also come in other forms that are subject to taxation, including the following:

• Rental income
• Bonuses
• Hourly wages
• Tips
• Gambling winnings
• Trust or estate interest income
• Royalties
• Alimony
• Business income
• Dividends
• Pension
• Income from self-employment
• Capital gains
• Savings account interest

It’s important to understand what is taken out of your paycheck for both individuals and business owners. Business owners are responsible for making sure both state and federal taxes are properly paid out.

Below are a few taxes and deductions you may notice on your next pay stub:

• Payroll tax: This tax includes Social Security and Medicare tax rates.
• Income tax: This tax is dependent on your earned income (salary, tips and commission). Some states have both state and local income taxes.
• Pretax deductions: These are usually retirement and health care contributions.

There are types of gross income that are nontaxable, including:

• Alimony payments
• Gifts and inheritances
• Welfare payments
• Most health care benefits
• Child support payments
• Some Social Security benefits

It’s important to have a good understanding of what gross income is, since it’s used for some essential purposes, including:  

• Loan qualification: Your lender will usually ask for physical proof of income when applying for a loan. They typically want to make sure your gross income meets a standard minimum before approving a loan. With that, your debt-to-income ratio, or DTI, will indicate how much you’ll qualify for.

• Taxes: Your gross income, along with other factors, determines how much you owe in both federal and state taxes.

• Salary negotiations: Knowing what your gross pay is can help you discuss a higher gross income when salary reviews occur at your workplace.

• Rental applications: Landlords or property managers typically check a potential renter’s gross income to determine if they will be able to pay rent on time.

• Credit limit: Credit card lenders use gross income as a determining factor for setting your credit limit.

Calculating your gross income can look different for anyone, as it’ll depend on how many sources of income you have. Here’s how to calculate both your weekly and annual gross income.

Weekly gross income

• 40 hours worked at $20 per hour = $800
• Bonus = $150
• Commission = $200

Total weekly gross income = $1,150

Annual gross income 

• Yearly salary = $52,000
• Yearly bonus = $5,000
• Interest = $500
• Stock dividends = $500
• Selling products online = $1,000

Total annual gross income = $59,000

Business annual gross income

• Gross revenue = $300,000
• Cost of goods sold and employee salaries/expenses = $200,000

Total yearly gross business income = $100,000

There is a key difference between your gross and net income. Your net income is your take-home pay after taxes and other deductions are subtracted. Your gross income is the starting total sum before these deductions are subtracted. Here are a few examples of deductions you may see: 

• Retirement savings contributions
• Health insurance payments
• Health savings account (HSA) deductions
• Self-employment tax

When creating a budget, it should be based on your net income rather than your gross income. Your net income is the total funds you can actually spend, whereas gross income still includes funds that will be deducted.

Adjusted gross income, or AGI, is your total income for a tax year without certain qualified tax adjustments. These adjustments can be student loan interest, IRA/401(k) contributions or business expenses.

After an individual’s AGI is calculated, deductions are then subtracted to determine taxable income. AGI also determines your eligibility for tax credits. You can find your AGI on your IRS Form 1040.

It’s important to know your current gross income when planning to take out a mortgage. Lenders will typically evaluate your gross income to establish how large a loan you can afford. If you’re interested in learning more about how to financially plan for purchasing a home, check out the Learning Center at Rocket Mortgage^®.