Examples and Definitions of Gross Income
Before payroll taxes and other deductions are made, your gross income is the amount you make, typically in a paycheck. It affects your home loan eligibility and is used to compute your federal and state income taxes.
Consider the scenario where your weekly gross income is $800. However, you only keep $675 of your net income, which is left over after taxes and other deductions.
Pre-tax income and before-tax income are some possible names.
What Drives Gross Income
Your gross income is what you receive as a salary. Gross income includes bonuses as well. The gross income shown on a pay stub for hourly employees equals the hourly wage times the number of hours worked. W-2 forms that employees receive from their employers at tax time also include gross wages.
In addition to a W-2 job, your total gross income can come from various sources. You might also receive money from, for instance:
- Freelancing
- Work-from-home jobs like driving for Uber or Lyft
- Consulting
- Tips
- Self-employment
- Selling products through online storefronts like eBay, Etsy, Craigslist, etc.
- Selling goods at a craft fair, swap meet, or other events
- Income from rentals
- Interest, dividends, and investment capital gains
- Alimony
- Royalties
- Mineral, gas, or oil rights
- Winnings from lotteries or gaming
Because you won't owe taxes on some forms of income, you don't need to report them on your income tax return. This includes a few different kinds of income from municipal and state bonds, various Social Security benefits, a few different inheritances and gifts, and a few different life insurance payouts.
Warning:
When you file your taxes, you should include all of your earned income, including any side income not included on Form 1099s.
Additionally, it might be a good idea to file a tax return even if you are unemployed.
Comparing gross and net income
Gross Income:
- Your overall earnings
- Your genuine pay
Net Income:
- Fewer taxes and deductions than your income
- Your remuneration
The sum of all of your income is your gross income. It exceeds your net income, which is your income less any withheld taxes and other deductions. Employers must deduct federal, state, and Social Security taxes and Medicare taxes. They also deduct any benefits you've chosen to receive, such as health insurance premiums and contributions to flexible spending or health savings accounts.
You'll base your budget on your net income. You can do whatever you want with the pay. You receive gross income if you work for yourself or as an independent contractor. Since your employer won't be deducting taxes on your behalf, you'll need to set aside money for them yourself. You may need to file quarterly estimated taxes, and an accountant can help you decide how much to set aside.
Gross Income Adjusted (AGI)
You can see how expenses and deductions can lower your gross income after adding up all your sources to find your overall income. This lowers your tax liability. The following can reduce your gross income:
- Materials, mileage, or equipment rental costs are examples of business expenses.
- Educator costs
- Interest on student loans (with some qualifications)
- Payments made to specific retirement accounts
- Financial institutions' penalties for early withdrawals of savings
- Deductions for health savings accounts (HSAs)
- Direct payment for jury duty sent to the juror's employer
- Paid maintenance
- Half of the self-employment tax is deductible.
Self-employment SEP-IRA, SIMPLE IRA, and 401(k) deductions
Your adjusted gross income (AGI), which is used as the basis for your income taxes, is your income after these adjustments to income.
Main Points:
- Your gross income is your earnings before any taxes, or other deductions are made.
- It affects the amount a person can borrow to purchase a home and is used to compute your federal and state income taxes.
- Your gross income may come from various sources, including a salary, hourly pay, tips, freelancing, and more.
- After taxes and other deductions have been taken out, your income is known as your net income. "Take-home pay" is another name for it.
- Your gross income less than-the-line deductions like student loan interest equal your adjusted gross income (AGI). Your income taxes will be calculated using this.
