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What Is Gross Income?
What does gross income mean? Gross income is the total individual pay that an employee receives from the employer before the taxes and other deductions are made.
The total amount of income that an individual receives in a year is referred to as the gross annual income.
Gross income includes all the incomes from all sources including interest income, capital gains, tips, royalties, gambling winnings, pension, dividends, and rental income.
Some income sources are not included in the gross income for taxing. Still, they are included when calculating gross income for a creditor or lender such as social security benefits, state bond interest, pay-outs of insurances, and some gifts and inheritance (Brooks, 2017).
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Adjusted Gross Income
Adjusted gross income is a calculation from gross income that is used to determine the amount of income that is taxable.
It is obtained after deduction is made on an individual’s gross income. The deduction made to obtain the adjusted gross income include life and health insurance, contribution to retirement plans, alimony, moving expenses, educator expenses, student loan interest deductions, and IRA contributions.
Taxation is then carried out on the adjusted gross income. Taxable income is the amount of money from the gross income that is subject to taxation (Alstadsæter & Jacob, 2016).
The taxes that are deducted from gross income are federal and state income taxes, social securities, and Medicare tax. These taxes are deducted based on a fixed percentage in relation to the gross income.
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Business Gross Income
Individual gross income varies from a company’s gross income. The gross income of a company is referred to as the gross profit, and it’s indicated in the income statement.
It represents the amount that a company earns from the sale of services and goods less the costs of obtaining those goods. It shows the profitability of a company or a business.
The gross margin may, at times, be used to refer to gross income or the gross profit margin, which is defined as a percentage (Rinier & Curatola, 2018).
A company’s gross income excludes all expenses costs, such as selling and distribution expenses, administration expenses, taxes, and advertising.
To obtain the company’s gross income, the cost of goods sold is subtracted from the sales revenue. Sales revenue is the total amount of money generated from the sale of the company’s services and goods without any deductions being made.
All the costs incurred with the manufacturing of the product or service that the company sells is the cost of goods sold. It includes costs of the raw materials, supply costs, labor expenses, and the purchase of machinery for production (Dahlquist et al., 2017).
Business owners refer to gross income as net business income.
Net income is the residual of the gross income after all the tax deductions in an individual and after all the expenses of a company are accounted for (Arnason, 2017).
The net income of a company is obtained when the cost of goods sold, taxes, general expenses, and interests are subtracted from total sales of the services and goods.
Gross profits include all the direct production costs while operating profits include additional costs except taxes and payment of debts by the company.
The net income in a company shows the profitability and success of the business while on an individual level, it helps the person to plan his or her expenditure to cover all the necessary expenses and probably save some money.
Gross income is used by lenders and landlords to establish if the individual is worthy of loans and mortgages and how much he or she will be given.
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Alstadsæter, A., & Jacob, M. (2016). Dividend taxes and income shifting. The Scandinavian Journal of Economics, 118(4), 693-717.
Arnason, R. (2017). Gross versus Net Income Taxes and Progressivity. Cutting Taxes: To Increase Prosperity, 4, 25.
Brooks, J. R. (2017). The definitions of income. Tax L. Rev., 71, 253.
Dahlquist, M., Martinez, J. V., & Söderlind, P. (2017). Individual investor activity and performance. The Review of Financial Studies, 30(3), 866-899.
Rinier, J. W., & Curatola, A. P. (2018). Hobby Gross Income and Expenses after the TCJA: The Tax Cuts and Jobs Act of 2017 may have made the reporting of hobby gross income and expenses even more challenging for taxpayers and their tax preparers. Strategic Finance, 100(1), 15-17.