Gross Income

Gross income summary:

• Gross income is your total income from all sources without anything subtracted. 

• You calculate gross income by adding up your wages, bonus pay, pension income, investment income, income from rental estate, and income from any other source.

• Your gross income affects your finances in many ways, from how much you pay in taxes to how much money you can borrow, to whether you qualify for Chapter 7 bankruptcy.

Gross Income Definition and Meaning

Gross income is the sum total of all of the income or money you receive from any source, before subtracting taxes or taking other deductions.

Your gross income is an important financial number. It's the starting point for determining how much tax you owe and how much you can afford to borrow for things like a home or a car. Gross income can also determine whether you're eligible for certain kinds of debt relief, such as Chapter 7 bankruptcy. 

Key Components of Gross Income 

Calculating gross income requires identifying all your income sources.  

Some people have only one source of income. If you have one job that pays you a salary and no income coming from anywhere else, your gross income equals the salary you were offered at your job plus any commissions or bonuses. For example, if you make $40,000 per year with no bonuses, tips, commissions, or other add-ons, your annual gross income is $40,000. 

Others may have multiple sources of income. Their gross income would be the sum of the money they get from all those sources. For example, your gross income could include money from:

• Your salary, including your base pay plus overtime, bonuses, and commissions

• Dividends and capital gains from investments

• Income from self-employment, like a small business, side gig or freelance work

• Income from a part-time or second job

• Rental income

• Retirement account distributions and pension income

• Social Security income

• Alimony and child support

You'll need to add up the income you receive from all these different sources to determine how much your gross income is. 

How Is Gross Income Used?

Gross income is used in different contexts. 

• Lenders look at your gross income when determining if you can borrow money. Your debt-to-income ratio (DTI) is a key factor, along with your credit score, that lenders use to decide if you're eligible for a loan or mortgage. Gross income is part of the DTI calculation. 

• You can look at your gross income when deciding whether something is affordable or not. For example, it's a common rule of thumb that you should try to keep housing costs under 30% of gross income. 

• Gross income impacts your income tax bill. You start with your gross income and subtract allowable deductions, adjustments and exemptions to find out how much your taxable income is. 

• Gross income can affect your eligibility to file for Chapter 7 bankruptcy. You must pass a means test to qualify to file. The means test compares the average of your gross income in the six months before bankruptcy to the state's median income. If your average gross income is lower than the state median, you're assumed to be eligible.  

Gross income is also the starting point to calculate your net income, which is the income you take home. Your net income is determined by taking your gross income and subtracting taxes and other deductions, such as health insurance premiums. 

Since gross income matters in so many financial contexts, everyone should calculate theirs and know this number.