Gross income: How to calculate it?

To be able to prepare tax and personal finance, you would need to know income form as well as classification. United States’ gross income would provide the very first hard dollar amount upon which taxability of an individual’s income would rest.

Your tax liability, as well as eligibility to claim credits and deductions, is calculated according to your adjusted gross income, or AGI, and your gross income.

It is essential that you know your gross income so that you can properly gauge the amount you need to pay in taxation and plan accordingly.

What is gross income?

Gross income is everything you have made before you have calculated your own costs or your deductions. It’s your wages, your self-employment, investments, rental income, and other income.

We call this the “before” because we’re calculating it first with the tax. This is not the net, or tax income, but the gross, after the cost and the deductions have already been taken out.

The IRS argues that “all income from whatever source derived” constitutes the gross income, with the exception of income exempt under statute.

Sources of gross income

Gross income sources can be very diverse. Most common sources and where they are required to be reported are set out below:

• Wages and salaries: The compensation an employee is paid. Calculated on Form W-2.
• Self-employment income: Determined after business income is adjusted for business deductions. Generally shown in Schedule C and Form 1099-NEC.
• Business revenue: Business income is equal to business revenue minus cost of goods sold or COGS.
• Capital gains: Earnings from the disposal of assets, shares, or other investments. May be short-term or long-term depending upon which tax they are subject to.
• Dividends: These are payments from a mutual fund or stock, are income, are taxed, and are being sent to you on Form 1099-DIV.
• Interest income: This pertains to interest income derived from CD, bonds, or saving account. It is reflected on Form 1099-INT.
• Rental income: Rental income – rental costs incurred.
• Passive income: Royalties, investments, or effort-independent income at an individual level.
• Alimony received prior to 2019: This can consist of unemployment compensation, winnings through lotteries or gambling, etc.

How to calculate gross income 

To file your tax returns properly, your total gross income needs to be calculated accurately. Use the following method to do this:

1. Sum all the income that you earned this year—salary, self-employment income, interest, dividends, and so forth—on your form before you deduct any expense or deduction.
2. Bookkeeping: Maintain accurate, complete, and well-kept records of all income sources, i.e., bank statements, 1099s, and pay stubs.
3. Use the relevant tax form such as W-2, 1099-NEC, 1099-INT, Schedule C, or the relevant form to document all sources of income.
4. Online resources and tools: Online resources and tools like IRS Income Tax Calculator, QuickBooks, or TurboTax may be utilized for income estimation and tracking.

What is Adjusted Income (AGI)? 

AGI is your income reduced by certain “above-the-line” deductions. These are special tax-deductible items which are taken out in an effort to get to your income before your tax is calculated.

• Above-the-line deductions: This can involve student loan interest, contributions to Traditional IRA plans, HSA contributions, educator expenses, and self-employed health care premiums.
• Why is AGI significant: Your AGI also determines your tax credits, tax deductions, and other tax advantages you can claim (e.g., Child Tax Credit or American Opportunity Credit).
• Gross income and AGI: Your gross income encompasses all sources of income. Certain pre-deductions before the regular or itemized deduction limit are not part of the AGI.
• Example calculation: Your income for the year is $80,000, and your above-the-line deductions are $5,000. Your AGI would be $75,000.

Income and taxable income

Gross income and taxable income are often referred to as the same, while there are two diverse computations in your tax calculation:

• Taxable income: This is calculated after you have reduced your AGI with regular or itemized deductions. This is the income that the IRS will use when they are calculating how much you owe.
• Standard vs. itemized deductions: Standard deduction is an amount which is non-income-related (i.e., $13,850 for single individuals in 2023), while itemized deductions are mortgage interest, charitable donations, medical, etc.
• Relationship: The relationship is: Gross Income → Taxable Income → AGI.

How is human resources related to gross income? 

Human resources units have the significant responsibility of logging, tracking, and counting the employee’s gross wages.

• Payroll: Human resources pre-tax or deduction processes an employee’s salary based upon pay period.
• Form W-2 filing: Form W-2, which shows an employee’s salary in terms of wages, is completed and handed over by HR.
• Tax withholding: Proper federal and state tax is withheld from an employee as per their W-4 and salary for the year by HR.
• Benefit calculation: Benefits such as contributions to the 401(k), or bonus, are calculated in terms of salary percentage.
• Compensation planning: Compensation numbers are utilized in HR units in comparing compensation, designing compensation plans, and logging in the increase.

Gross income for businesses

Business’s business income is very equally similar, in very minor exceptions, to reporting income as an individual.

• Revenue vs. gross income: Revenue is income before you take out costs. Gross income is income after performing COGS, or cost of good sold.
• Cost of goods sold (COGS): Material, labor, and direct cost of manufacture of item or the service.
• Reporting business income: Sole proprietors report business income under Schedule C. Corporations with Form 1120, and partners with Form 1065.

All tax returns are calculated from the gross income, and from where all of the AGI and taxed income figures are calculated. All income from sources are calculated, and it is meticulously monitored so that it can correctly, and accurately be reported for taxation.

Whether business owner, or individual, you need to know about the gross income—and how it is calculated into both the AGI, and the taxed income.

Good reporting for the purposes of gross income keeps you tax compliant, and supports good year-end decision making.