Difference Between Gross Income and Net Income?
The main distinction between gross income and net income is that gross income represents the total earnings before any deductions, while net income refers to the remaining amount after all taxes, expenses, and deductions have been subtracted. Below is a simplified comparison:
Basis | Gross Income | Net Income |
Definition | Total earnings before any deductions like taxes or expenses. | Income left after subtracting all deductions and expenses. |
Purpose | Used to calculate taxes and assess creditworthiness. | Represents actual profitability or take-home pay. |
Classification | Divided into earned (e.g., wages) and unearned income (e.g., dividends). | Can be positive or negative based on profitability. |
Business Context | Revenue minus the cost of goods sold (COGS). | Final profit after all expenses, including taxes and salaries. |
Taxation | Taxable income is not determined at this stage. | Taxable income is determined after deductions. |
Formula | Gross Income = Total Earnings (earned + unearned) | Net Income = Gross Income – Deductions/Expenses |
What is Gross Income?
Gross income is the total amount earned before deducting any taxes or expenses. It includes wages, bonuses, allowances, pensions, dividends, and profits.
For individuals: It’s often the starting point for determining tax liabilities or creditworthiness.
For businesses: Gross income reflects earnings minus the cost of goods sold (COGS) and helps measure sales performance.
Formula for Gross Income:
For individuals: Gross Income = Income earned from work + Additional earnings
For businesses: Gross Income = Total Revenue - Cost of Goods Sold
What is Net Income?
Net income is the amount left after all deductions like taxes, insurance, and expenses are subtracted from gross income. It represents an individual’s take-home pay or a business’s actual profit.
For individuals: It’s the final amount received after all payroll deductions.
For businesses: It includes gross income minus all operating and non-operating expenses, such as rent, salaries, and taxes.
Formula for Net Income:
For individuals: Net Income = Gross Income – Deductions/Expenses
For businesses: Income = Total Revenue – Total Expenses
Summary:
Gross income provides an overview of earnings while net income reflects financial health, whether for individuals or businesses.