When Asked for Monthly Income, Is It Gross or Net?

When asked to provide a “monthly income” figure, many individuals encounter confusion between “gross income” and “net income.” These two distinct figures represent different stages of an individual’s earnings. Understanding their differences is important for various financial activities and ensures the most accurate information is provided.

Understanding Gross Income

Gross income refers to the total amount of money an individual earns before any deductions are subtracted. It includes earnings from salary, hourly wages, tips, commissions, and bonuses. Income from self-employment activities (before business expenses), rental income (before associated costs), and investment income like interest and dividends also contribute to gross income.

Understanding Net Income

Net income, often called “take-home pay,” is the amount an individual receives after all mandatory and voluntary deductions are subtracted from gross income. This is the actual cash available for spending, saving, and managing daily expenses. Deductions include federal, state, and local taxes, plus FICA contributions for Social Security and Medicare. Voluntary deductions often include health insurance premiums, retirement account contributions (like 401(k)s or IRAs), and pre-tax deductions for Flexible Spending Accounts (FSAs) or Health Savings Accounts (HSAs). Net income is the most relevant figure for personal budgeting.

Common Scenarios for Income Requests

The type of income requested, whether gross or net, depends significantly on the purpose of the inquiry. Financial institutions, landlords, and government agencies often have specific requirements based on their assessment needs. Knowing which figure to provide can streamline application processes and prevent delays.

Lenders

Lenders, when evaluating loan applications for mortgages, auto loans, or personal loans, typically request gross income. They use this figure to assess borrowing capacity and calculate debt-to-income (DTI) ratios, as it reflects the applicant’s full earning potential before various individual deductions. For self-employed individuals, lenders may analyze net income after business expenses from tax returns or average bank statements over an extended period, generally two years, to determine a consistent earning history. The use of gross income helps lenders maintain a consistent standard across different borrowers, as personal deductions can vary widely.

Landlords

When applying for a rental property, landlords commonly ask for gross income. They often use a rent-to-income ratio, such as the “30% rule” (monthly rent not exceeding 30% of gross income), or require gross income to be at least two to three times the monthly rent. While gross income provides a quick assessment, some landlords may also consider net income to gauge actual funds available for rent and other living expenses.

Benefit Applications

For benefit applications, such as government assistance programs like the Supplemental Nutrition Assistance Program (SNAP) or Temporary Assistance for Needy Families (TANF), gross income is frequently used to determine eligibility. Some programs may also consider Adjusted Gross Income (AGI) or Modified Adjusted Gross Income (MAGI). When an income request does not specify “gross” or “net,” providing gross income is generally a safer approach. Clarifying with the requesting party is always advisable to ensure accuracy.

Calculating Your Monthly Income

Determining your monthly gross and net income involves reviewing payroll documents and applying simple calculations. For salaried employees, the gross monthly income can be found directly on a pay stub or by dividing the annual salary by 12. If paid hourly, multiply your hourly rate by the number of hours worked per week, then by 52 to get annual gross income, and finally divide by 12 for the monthly figure. For those paid bi-weekly, multiply the gross amount per paycheck by 26 (the number of bi-weekly periods in a year) and then divide by 12 to annualize. Self-employed individuals should track their total revenue before business expenses to determine their gross income.

To calculate net monthly income, consult the “net pay” or “take-home pay” line on your pay stub, or review direct deposit amounts in your bank statements. Similar to gross income, if your net pay is not reported monthly, annualize it by multiplying the per-pay-period net amount by the number of pay periods in a year (e.g., 52 for weekly, 26 for bi-weekly, 24 for semi-monthly) and then divide by 12. For individuals with variable income, such as those earning commissions or tips, it is often beneficial to average income over a period of several months, typically six to twelve, to derive a more accurate and stable monthly estimate.