What to Know About Gross vs. Net Income

A lack of a better understanding of your income could affect your expenses and planning. It would be hard for you to make an informed budget if you are unsure of the difference between gross and net income.  

You will find a breakdown of the two and all the necessary information you need to know regarding your income on this page

As an individual, your gross income is the total pay you earn from your workplace or customers before any deduction. The pay may also include cash, services, or property received. 

On the contrary, net income refers to any payment you receive after appropriate deductions such as taxes. Companies consider their gross income to be the revenue they receive after subtracting the cost of goods sold. In this case, the net income of the company is the money they receive as profit. 

Breakdown of the Gross Income

Note that the gross income is more than your salary or wages and can include other income forms such as dividends, interests, rental income, and alimony. 

However, if you only have one income source, your gross income amounts to your total salary before any deductions on taxes or benefits.

For example, a full-time teacher earning $50,000 yearly will consider the amount as the gross salary. 

Similarly, if you’re a freelancer or independent contractor, the gross salary includes everything you received as payment from the clients.  

Breakdown of The Net Income

Essentially, the net income is calculated by subtracting deductions from your gross income. This is what you take home or use for your expenses from the salary. To calculate the net salary, you first need to add all taxable wages, income, and tips you receive from dividends or investments. 

It would be best to subtract notable deductions such as contribution to Medicare taxes, social security, retirement account, insurance payment, and income taxes. The deductions should also include any obligations such as child support or loan repayment. 

So if we use the example of a full-time teacher earning $50,000 per year, they should subtract insurance payments, taxes, retirement contributions, and any other deductions to find their net income. 

Roughly you expect the teacher to have a net income of $40,000, which is the take-home pay. 

Understanding the net income can help you create a realistic idea of how much you should spend and understand the total amount you pay to taxes and other obligations. 

Understand Taxable Income on This Page

Your taxable income is also referred to as the adjusted gross income (AGI), and it includes the amount you are left with after subtracting standard deductions. 

Calculating your AGI will help you decide whether to itemize your tax-deductible expenses or take the standard deductions. It is worth noting that income sources such as social security benefits, inheritances, bond interests, and life insurance payouts are not considered gross income and cannot be taxed. 

Understanding the different types of income and taxes will help you plan and know when you are losing money. Notably, your type and means of income will be significant in determining taxability and the amount of taxable income.