Gross vs Net Income
The two types of income earned by any company/firm/individual are gross income and net income. Gross income is the total income earned by a firm or individual in a specific time period and net income is the income excluding taxes, and other deductions. Gross vs net income is the comparison and difference of both types of income that you will be studying in detail in this article. You will learn about gross vs net income for both individuals and companies.
| 1. | What is Gross Income? |
| 2. | What is Net Income? |
| 3. | Difference between Gross and Net Income |
| 4. | FAQs on Gross vs Net Income |
What is Gross Income?
For an individual, gross income is defined as the total income earned in the form of cash, funds, rental allowance, pension, interests, and dividends. Whatever remuneration an employer gives to an employee in the form of monetary (salary in cash) and non-monetary allowances (insurance, rent, transportation, pension, tax, etc) is included in the gross income of the individual. It is also referred to as gross profit, gross earnings, or gross pay. For example, if a person earns $6500 including salary in hand $5100, $300 for transportation, $300 for insurance, $400 for the pension plan, $400 is in the form of dividends, then $6500 is the gross income of that person.
On the other hand, for companies, gross income is defined as the deduction of the cost of goods sold from the total revenue of the company in a specific period of time. Mathematically, it can be expressed as,
Gross income = Revenue - Coss of goods sold (COGS)
The cost of goods sold is the production cost of the company. It includes all the expenses related to the production, for example, cost of labor, cost of raw materials, etc. Revenue is the money earned from the sale of goods and services of a company. So, when we subtract the production costs from the total revenue of the company, we will get its gross income.
What is Net Income?
Net income is defined as the amount left after deduction of all expenses from the gross income. It is also referred to as net profit, net earnings, or net pay. For individuals, net income is the 'salary in hand' or 'take-home income'. It is calculated by subtracting all the deductions from the gross income. In the above example, $6500 was the gross income of the individual, but the net income was $5100 ($6500 - $300 - $300 - $400 - $400). In other words, net income is calculated by subtracting taxes, pension, transportation allowances, and other allowances from the gross salary.
For companies, net income can be defined as the deduction of all operating expenses (apart from COGS) from the gross income. Operating expenses include rent, electricity charges, advertisement expenses, taxes, maintenance, and repairs, etc. The formulas to calculate net income are given below:
Net Income = Total Revenue - Total Expenses
OR
Net Income = Gross Income - Operating Expenses - Other Business Expenses - Taxes - Interest on Debt + Other Income
The relationship between gross and net income is explained with the help of formulas written below.
Difference between Gross and Net Income
Now, let us learn the difference between gross vs net income through an example and a table. A list of the company's expenses and revenue is given below. Find the gross and net income of the company.
| Revenue | $110000 | Cost of raw materials | $2200 |
| Electricity | $1500 | Advertisement expenses | $250 |
| Rent | $500 | Equipment costs used in production | $2400 |
| Salary of labor | $9500 | Other income | $3500 |
Based on the given information, the gross income can be calculated as:
Gross income = Revenue - Salary of labor - Cost of raw materials - Equipment costs used in production
Gross income = $110000 - $9500 - $2200 - $2400
= $95900
And the net income can be calculated as,
Net income = Gross income + other income - Electricity - Rent - Advertisement expenses
Net income = $95900 + $3500 - $1500 - $500 - $250
= $99400 - $2250
= $97150
Therefore, when we talk about gross income vs net income, it is whether we are deducting all expenses or not. If we deduct all expenses from gross income, we will find the net income. And if we add all operating expenses in net income, we will get gross income. Look at the diagram of gross vs net income given below.
Here, when we take out deductions, we are getting net income which is Gross income - Deductions. Look at the tabular difference between gross and net income given below:
| Gross Income | Net Income |
|---|---|
| It is the amount earned by an individual or firm before deducting the expenses. | It is the amount earned by an individual or firm after deducting all the expenses. |
| It is the total salary a person earns before taxes. | It is the net salary a person gets after paying taxes. |
|
It can be calculated by deducting direct expenses/production costs/cost of goods sold from the revenue earned by the company. Gross Income = Revenue - Cost of Goods Sold |
It is calculated by deducting all other expenses and adding other income, if any, to the gross income. Net income = Gross income - Other Expenses + Other Income |
| It is generally higher than the net income. | It is generally lower in amount than the gross income. |
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FAQs on Gross vs Net Income
What is Net Income vs Gross Income?
Gross vs net income is the study of comparison and difference between gross and net income for individuals and for companies. Gross income is the income before deducting any expenses or taxes. It includes all the allowances and taxes. While net income is defined as the income after tax.
What is Adjusted Gross Income vs Net Income?
Adjusted gross income is the taxable income calculated after deducting and making certain adjustments. Our gross income is not always fully subjected to tax. There are some adjustments to be made to find the taxable income out of it by deducting non-taxable income based on guidelines of the Internal Revenue Service (IRS). And net income is the income after tax. Both adjusted gross income and net income are calculated from the gross income.
What is the Difference between Gross Income and Net Income?
Gross vs net income is important for us to understand to make decisions to maximize our earnings. If the difference between gross and net income is huge, it means that we are paying more tax. Based on this deduction, we can make decisions related to increasing our non-taxable income, which will eventually decrease our taxes. The difference between gross and net income is mainly in deductions. Gross income is the income before tax, and net income is the income after tax.
How do you Calculate Gross vs Net Income?
Gross income can be calculated by using the formula: Gross income = Revenue - Cost of goods sold. And net income can be calculated by using any of the given two formulas: Net income = Total Revenue - Total Expenses, or Net income = Gross Income - Other Expenses + Other Income.
Do you use Gross or Net Income for Taxes?
Gross income is used to compute taxes. For the calculation of taxes, we make certain adjustments in our gross income and find our adjusted gross income. That is considered as the taxable income.
What is More Gross or Net Income?
Gross income is usually higher than the net income as it includes expenses or taxes of the company or individual. When we deduct taxes or expenses from the gross income, we get the value of net income. So, net income is lesser than the gross income.
How to Calculate your Gross Income from your Net Income?
If we add taxes/expenses to the net income, we will get the gross income. So, Gross income = Net income + Expenses.
How to Calculate Net Income from Gross?
Net income can be calculated from gross income by subtracting the amount spend in paying taxes and other expenses from it. So, Net income = Gross income - Expenses.