What is Gross Income?

Gross income is like your profits from a day selling lemonade at a roadside stand as a kid…

The calculations are simple if you look at the money people paid for lemonade minus what it cost you to buy the ingredients. Things will get more complicated if you start a lemonade company, buy equipment, enter contracts with suppliers, hire employees, and pay taxes.

Because gross income is revenue minus cost of goods sold, it can help show how efficiently a company creates and sells its products and services. Management of labor costs and other direct costs must be managed well to maintain control of COGS. Gross income is also the formula starting point for gross profit margin (ratio of gross profit to sales), which is another tool for measuring company efficiency.

Gross income ranges will vary widely between industries. This means comparing the gross income of a computer maker to a pencil manufacturer would not make sense. However, it can sometimes be helpful to see if a company making computers has a gross income similar in range to other companies that produce computers -- At least if used in conjunction with other measures.

Finally, comparing gross income with the net profit or net losses can provide helpful information. By looking at these numbers, one can get a feel for how significantly the costs of a company beyond COGS impact the bottom line of the company. For example, when a company has a slim margin (small difference) between revenue and COGS (a low gross income), it can indicate that it might be vulnerable to changes in costs or the marketplace. If labor costs rise or competition reduces prices, the company might not have room to make changes needed to compete while still maintaining a positive gross income.

Gross income, net income, total income, and revenue are related numbers, but they are not the same.

Gross income Gross income is revenue minus the cost of goods sold (COGS), the direct costs of making and selling a product or service. Because companies have more expenses than COGS, this is not a bottom-line profit number. Therefore, a company with a positive gross income could still show a net loss.

Net income Net income is the bottom line of a company. Net income shows whether or not a company made a profit or took a loss for a set timeframe. It is total revenue minus total expenses. Think of it as a refinement on gross income that considers all company costs, not just COGS.

Total income For an individual, total income refers to the amount of money received from wages and any other sources of income over a set time. For a company, total income is not often used — but it can refer to total revenue minus total expenses (basically interchangeable with net income).

Revenue Revenue differs from gross income, net income, and total income because it is not a profit calculation. Revenue represents money taken in by a company from sales of products or services before subtracting costs and other expenses. Revenue is the starting point for calculating most profit figures and is often called the top line because of its location on financial statements. Revenue may also be called gross sales.

The formula for gross income is revenue minus cost of goods sold (COGS). Bear in mind that gross income might appear as gross profit or gross margin on an income statement instead of as gross income.

The cost of goods sold (COGS) also appears on the income statement but could have a different label, such as the cost of services, if the company is a service only company. Occasionally, a company may list COGS and the cost of services as separate line items. In this case, both values would need to be subtracted from revenue to get the gross income number.

Gross income is an integral part of a company’s financials as well as an essential part of understanding an individual’s finances. However, whether or not gross income must be reported depends on many factors.

Gross income reporting requirements vary based on if it is the gross income of an individual or the gross income of a company. If working with the gross income of a company, reporting requirements vary by the type of company structure used for filing taxes.

For example, an LLC might be taxed only through the members’ (owners’) income taxes but still must file annual reports with the state where the LLC was registered. Whether gross income is part of the annual reporting requirements to the state depends on the rules for the state in which the LLC registered.

Corporations and other businesses being directly taxed would have to report revenue, some costs, and profits. However, whether or not gross income is required as a separate line item depends on the tax structure and forms filed for each specific business. For most, revenue and costs will be entered separately on tax forms and not as a pre-computed number.

The U.S. Securities and Exchange Commission (SEC) requires publicly traded companies (a company with stock traded on a stock market) to make annual and quarterly financial statement reports along with other disclosure reports (called filings). Gross income is one of the line items to be included in the income statement part of the required financial reports.

Private companies do not have to make financial reports such as income statements public.

Individuals are required to file income tax returns with the IRS and, in states with an income tax, their state revenue department. Some cases may require filing taxes where the individual worked as well as, or instead of, their home state. A few exceptions to filing requirements exist but are dependent on any number of factors.

Individuals may use the online Do I Need to File a Tax Return web page from the IRS to determine if they must file a tax return. Alternately they may consult their tax professional, or the IRS helpline, to find out if they must file a return. Gross income must be disclosed on all income tax returns. A limited number of types of income are allowed to be excluded from the gross income calculation for tax purposes, such as Veterans Administration (VA) disability payments.

Adjusted gross income (AGI) is part of personal finances, not company finances. AGI is your starting point of taxable income on state and federal income tax forms.

Calculate AGI by subtracting qualified items from your gross income. Some of the qualified items are:

• contributions to eligible IRAs
• alimony paid
• moving expenses (military)
• half the self-employment tax
• HSA deductions
• property sale/exchange losses
• early withdrawal penalties
• certain business expenses
• jury duty pay if it was previously turned over to an employer

Note that the gross income includes items not reported on your taxes, such as Social Security payments and unemployment income. AGI is then the starting point from which deductions are subtracted to calculate your income taxes owed.