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Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo How we make money
You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. What is gross income
Gross income refers to the total earnings a person receives before paying for taxes and other deductions. The amount that remains after taxes are deducted is called net income. When looking at a pay stub, net income is what’s shown after taxes and deductions. Net income is always lower than gross income unless the person is exempt from paying taxes and has no deductions. How gross income works
Gross income typically comes from a paycheck, which can comprise a combination of hourly wages, salary, commission and bonuses. But gross income can come from other sources such as annuities, alimony, pension, capital gains, rental income, royalties and income from self-employment. These forms of income are often only partly subject to taxation. Other sources of gross income subject to taxation are: Alternative compensation for services rendered Business income Dividends Gambling winnings Gas, oil, or mineral rights Income from discharged debt Income from a decedent or as an interest of an estate or trust Interest from bank accounts, certificates of deposit (CDs), etc. Selling goods online or in-person Tips Some examples of nontaxable income include inheritance, municipal or state bonds, workers’ compensation payments and life insurance proceeds. Employers withhold state and federal income taxes, Medicare and Social Security taxes from your paycheck before you receive it. For business owners, self-employed and independent contractors/freelancers, payment is received as gross income and it is their responsibility to pay their share of taxes. A business’s gross income is calculated as gross revenue minus the cost of goods sold (COGS) and may be referred to as gross margin or gross profit margin as a percentage. Example of gross income
Here is an example of what gross income looks like for an individual on a weekly basis: 45 hours worked at $15 per hour = $675 Commission = $150 Bonus = $500 Gross income = $1,325 Here is an example of what gross income might look like on an annual basis: Annual salary: $55,000 Annual bonus: $5,000 Rental income: $10,000 Interest: $675 Stock dividends: $500 Side business income: $10,000 Selling goods online: $1,300 Total annual gross income: $82,475 To determine a business’s annual gross income, here is an example: Gross revenue: $250,000 Cost of goods sold: $200,000 Total annual gross business income: $50,000 Why understanding gross income is so important
Gross income is what is used by lenders to determine how much they will allow someone to borrow for a loan, like an or . The lender will determine how much to lend based on the individual’s , or DTI. The DTI is determined by dividing monthly debt payments by monthly gross income. The higher someone’s DTI, the less likely a lender will want to loan money and the higher the interest rate on the loan will be. Ideally, DTI should be no higher than 36 percent; however, some lenders will lend as high as 50 percent DTI. Gross income vs net income
The total amount of pay received is the gross income, while the net income is the remaining amount after taxes and deductions are removed. Deductions could include: Health insurance premiums Life insurance premiums Voluntary benefits (accident, sickness, critical injury, disability, etc.) Flexible spending account contributions Health savings account contributions Job-related expenses (uniforms, union dues, meals, travel, etc.) Retirement contributions Wage garnishments Child support payments Most deductions lower taxable income. These are known as pretax deductions. Other deductions, such as contributions to a Roth IRA and certain voluntary benefits, do not lower taxable income. These are known as post-tax deductions. Net income is often called take-home pay or . Net income is what is leftover to spend and can be used to make a budget. Living expenses, bills, debt payments and other obligations should be budgeted out of net income rather than gross income. based on gross income will likely cause the budget to be short each month, because the amount required for the budget is reduced by the deductions and taxes taken. Here’s an example of why a budget should not be based on gross income without accounting for deductions and taxes. Sally has a monthly gross income of $4,000 and a net income of $3,000. She creates a budget with her gross income amount with total expenses equalling $3,500. Because Sally only brings home $3,000, she is short $500 on the monthly budget. Sally will either have to adjust her budget to account for the $500 or find a way to increase her net income by $500 to cover the remaining expenses. You can to categorize your spending transactions, identify ways to cut back and improve your financial health. Learn more
SHARE: Mandy Sleight has been a licensed insurance agent since 2005. She has three years of experience writing for insurance websites such as Bankrate, MoneyGeek and The Simple Dollar. Mandy writes about auto, homeowners, renters, life insurance, disability and supplemental insurance products. Lance Davis is the Vice President of Content for Bankrate. Lance leads a team responsible for creating educational content that guides people through the pivotal steps in their financial journey. Kenneth Chavis IV is a senior wealth manager who provides comprehensive financial planning, investment management and tax planning services to business owners, equity compensated executives, engineers, medical doctors and entertainers. Related Articles