Gross & Net Income Simply Explained

Anyone who's a new taxpayer will eventually hear the terms gross and net income but have no idea how to tell the difference from each other. One thing new taxpayers and small business owners should know is that you'll hear the terms gross and net income a lot when it comes to your personal finances, business finances, and even your taxes.

It’s important to know how gross and net income are different from each other. Gross income is usually the higher number because in most cases it's the total income before accounting deductions. Net income is usually what's left after accounting for deductions or withholding.

Gross Income

Gross income typically comes from a paycheck, which includes 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.

Gross income, often known as gross profit, is a business's revenue minus the cost of the goods it sells. After selling its products and accounting for the cost of goods, this sort of income reveals how much money a company has left over to cover the balance of its expenses.

Net Income

Net income is the amount of money leftover from a company's revenue after expenses and tax payments have been made in a period. It's an important measure in understanding the financial strength of a company. The net income of a firm is used by investors and analysts to measure its profitability.

For example, Lindsay earns $40,000 per year as a teacher. After she subtracts taxes, insurance payments, her retirement account contributions, and any other deductions that come out of her pay, her net income may actually be closer to $30,000. This is her “take-home pay.” Net income can give you a more realistic idea of how much you will wind up spending in taxes each year and can give you a more realistic notion of how much you will end up paying in taxes every year.

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