Is Gross Income After or Before Taxes?

Financial terms like “gross” and “net” can cause confusion, especially when discussing income and taxes. Understanding these concepts is important for managing personal finances and business operations. Clarifying these distinctions provides a clearer picture of one’s financial standing and obligations.

Understanding Gross Income

Gross income is the total money an individual or business earns before any deductions, expenses, or taxes are taken out. For an individual, this includes wages, salaries, tips, bonuses, commissions, and investment income like dividends or interest. For example, if a job offer states an annual salary of $60,000, that figure is the gross salary.

For businesses, gross income, also known as gross profit, is the total revenue from sales minus the direct costs of producing goods or services, known as the cost of goods sold (COGS). This calculation shows a company’s core profitability before operating expenses or taxes. Gross income is the starting point for various financial calculations and indicates earning potential.

The Relationship Between Gross Income and Taxes

Gross income is calculated before taxes are applied or withheld. After total earnings are determined, taxes are deducted from this gross amount. These deductions include federal income tax, state income tax (where applicable), and payroll taxes like those mandated by the Federal Insurance Contributions Act (FICA).

FICA taxes fund Social Security and Medicare, and are withheld from employees at a combined rate of 6.2% for Social Security up to a wage base limit, and 1.45% for Medicare with no limit. Employers must withhold these amounts from gross pay and remit them to the government. This system, known as tax withholding, ensures tax liabilities are paid throughout the year as income is earned, rather than in one lump sum.

Distinguishing Gross from Net Income

Net income is the amount remaining after all taxes and other deductions are subtracted from gross income. For individuals, these deductions extend beyond taxes to include health insurance premiums, retirement contributions, or other pre-tax benefits. This remaining amount is what an individual “takes home” or has available for spending and saving.

For businesses, net income, also called the “bottom line,” is the profit remaining after all operating expenses, interest, and taxes have been paid. Understanding both gross and net income is important for financial planning. While gross income reflects earning capacity, net income shows the funds available for use, making it a more accurate figure for budgeting and financial decisions.