Is Gross Income Before or After Taxes?

Caitlyn Moorhead
damircudic / Getty Images
damircudic / Getty Images

Your sources of income, whether received through a paycheck, side hustle, tips or burgeoning e-commerce store, all need to be accounted for when it comes time to file your tax return. Before filling out any forms for your federal and state income taxes, it is important to understand what your gross income includes and the difference between your net income and adjusted gross income.

Check Out: What To Do If You Owe Back Taxes to the IRS

Quick Take: Is Gross Income Before or After Taxes?

Your gross income is important because it helps determine how much you owe in taxes, and it is considered your total earnings prior to taxes or other deductions. Here are some key takeaways:

  • Your gross income includes hourly wages, annual salary, dividends, capital gains, business and retirement income and potentially a portion of your Social Security benefits.

  • Tips, rents, interest, stock dividends and more are considered taxable income.

  • Taxes are typically calculated based on your gross income, not your net income. So, even though you might take home a smaller amount after taxes, your tax bill is based on what you earned before taxes were taken out.

  • It includes all income received from all sources, including money, property, the value of services received or the cost of goods sold.

  • Though you will always have to file for your federal income taxes, there are nine states that don’t have state income tax: Alaska, Florida, Nebraska, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.

  • When you see your gross income on your paycheck, it’s before taxes are taken out. In other words, it’s the amount you would earn if there were no taxes or other deductions.

How To Calculate Your Gross Income

Gross income refers to the total amount of money you earn from your job or other sources before taxes. It includes your salary or wages, bonuses, tips, commissions and any other income you receive.

You can calculate it as your monthly salary before any deductions or the number of hours you will work per month multiplied by your hourly pay rate.

Gross Income vs. Net Income

Net income is the amount you actually take home after deductions are made. These deductions include taxes, as well as other things like retirement contributions, health insurance premiums, and any other deductions your employer might take out of your paycheck.

Think of it as gross income being like the starting point — it’s what you earn before anything is taken out. Net income is what’s left over after all the necessary deductions have been made and is your take-home pay.

Gross Income vs. Adjusted Gross Income

Adjusted gross income, or AGI, is defined as total income minus deductions, or other adjustments to your income that you are eligible to take. It starts out as gross income, but before any taxes are paid, the IRS reduces it.

Final Take To GO: Your Taxable Income

The bottom line is that understanding the difference between gross income and net income is key to managing your finances effectively. Gross income is the total amount you earn before any deductions, while net income is what you take home after deductions like taxes.

Knowing your gross income can help you budget and plan for taxes, ensuring your savings account is prepared in case you owe anything. So, next time you look at your paycheck, remember that gross income comes before taxes, and it’s an important piece of the financial puzzle.

FAQ

  • Does gross income mean before or after taxes?

    • Gross pay refers to what you earn before taxes, benefits and other payroll deductions are withheld from your salary or wages. The amount remaining after all withholdings are accounted for is net pay. Your AGI is your total income minus deductions, or other adjustments to your income that you are eligible to take.

  • How do I calculate gross income?

    • You can calculate it as your monthly salary before any deductions or the number of hours you will work per month multiplied by your hourly pay rate.

  • What is the difference between net income and gross income?

    • Net income is the amount you actually take home after deductions are made. These deductions include taxes, as well as other things like retirement contributions, health insurance premiums, and any other deductions your employer might take out of your paycheck, whereas gross income is what you earn before anything is taken out. Net income is what's left over after all the necessary deductions have been made and is your take-home pay.

  • What is an example of gross income?

    • If last year you earned $80,000 in salary, $1,000 in interest income, and $5,000 in sales from your e-commerce business, your gross income for the year would be all of those income sources added up and total $86,000 before taxes.

  • Is net income after taxes?

    • Yes, net income is what you or your business make after taxes or other expenses or deductions have been taken out. If you have a small business, the net income is what you have left after all expenses are subtracted, including taxes, wages, the cost of goods and other general overhead.

This article originally appeared on GOBankingRates.com: Is Gross Income Before or After Taxes?

Advertisement