What is the difference between net income and gross income?

Key takeaways

• Gross income is your total earnings before any deductions.
• To calculate your gross income, add up your total earnings, like salary, overtime pay, bonuses, commissions, freelance pay, etc., before any deductions.
• Net income is the amount of money you take home after all deductions.
• To calculate your net income, subtract all deductions, like federal and state taxes, Social Security, Medicare, and other benefits, from your gross income.
• Gross income helps with long-term financial planning, while net income is crucial for day-to-day budgeting.

What is gross income?

Gross income is your total earnings before any deductions. It's the full amount of money you receive from your job or any other sources of income, such as bonuses, freelance work (like side jobs, income from apps, delivery drivers, etc.), or investments, before taxes and other withholdings are taken out.

For example, if your job pays you a salary of $4,000 a month, that $4,000 (plus any other earnings you make) is your gross income. It represents your earnings before any deductions like federal and state taxes, Social Security, Medicare, health insurance premiums, and retirement plan contributions.

Gross income is the figure you see on your job offer letter or your employment contract. It's important because many financial decisions, such as loan approvals and tax brackets, are based on your gross income. However, it doesn't reflect the actual amount of money you have available to spend or save.

How to calculate gross income

To calculate your gross income, add up your total earnings before any deductions.

Your gross income includes…

• Regular salary or wages
• Overtime pay
• Bonuses
• Commissions
• Other earnings, such as side jobs, income from delivery apps, rental income, or investment returns.

Your earnings statement or pay stub will list your gross income, making it easier to verify your calculations.

Example of an individual’s gross income

Let’s say John’s regular salary is $4,000 per month. He made $600 per month in overtime pay and received a $2,000 bonus in January. He also makes $500 a month doing freelance work on the side.

Here’s how to calculate John’s annual gross income.

First, add up John’s monthly earnings.

$4,000 + $600 + $500 = $5,100

Then, multiply John’s monthly earnings by 12 and add in the annual bonus to arrive at John’s annual gross income.

($5,100 x 12) + $2,000 = $63,200

What is net income?

Net income is the money you take home after all deductions. In other words, it’s the cash in your pocket after taxes, health insurance, retirement contributions, and other expenses are subtracted from your paycheck.

Imagine you earn $4,000 a month. That’s your gross income. But after deductions like federal and state taxes, Social Security, Medicare, and other benefits, your actual take-home pay might be around $3,000. That $3,000 is your net income.

Understanding your net income is crucial because it’s the amount you can spend on necessities, entertainment, savings, and investments. It’s a more accurate reflection of your financial situation than your gross income because it shows what you have available after fulfilling all your obligations.

How to calculate net income

To calculate your net income, you simply need to identify all the deductions from your paycheck and subtract them from your gross income.

Deductions include…

• Federal taxes
• State taxes
• Social Security and Medicare
• Health insurance premiums
• Retirement plan contributions
• Other deductions, like union dues, life insurance, or flexible spending account contributions

Your paystub typically lists all the deductions. This makes it easier to see how your net income is calculated. It’s always a good idea to review your paystub to ensure all deductions are accurate.

Example of an individual's net income

Let’s say Sarah’s monthly gross income is $5,000. Her deductions include $800 for federal taxes, $200 for state taxes, $310 for Social Security, $75 for Medicare, $150 for health insurance, and $200 in 401-K contributions.

Here’s how to calculate Sarah’s monthly net income.

Add up Sarah’s total deductions.

$800 + $200 + $310 + $75 + $150 + $200 = $1,735

Then, subtract Sarah’s total deductions from her monthly gross income.

$5,000 - $1,735 = $3,265

To calculate Sarah’s annual gross income, simply multiply her monthly gross income by 12.

$3,265 x 12 = $39,180

What is the difference between net income and gross income?

The main difference between net income and gross income is the deductions. Here’s what you need to know.

Gross income is…

• The full amount you earn from your job before any deductions.
• The top figure on your paystub.
• Used to determine your tax bracket, eligibility for loans, and other financial assessments.

Net income is…

• The amount you receive after all deductions, like taxes, insurance premiums, and retirement contributions, are subtracted.
• The final amount on your paystub, often referred to as "take-home pay."
• What you use for budgeting your daily expenses, savings, and investments.

In essence, gross income is your earnings before any deductions, and net income is what you get to keep after all those deductions. Gross income helps with long-term financial planning, while net income is crucial for day-to-day budgeting.

Is net income before or after taxes?

Net income is after taxes. It’s the amount you have left in your paycheck after all deductions, including federal and state taxes, Social Security, Medicare, health insurance premiums, and retirement contributions.

What is the difference between AGI and net income?

Adjusted gross income (AGI) and net income are different concepts and used for different purposes.

AGI

• AGI is your gross income minus specific adjustments, such as student loan interest, IRA contributions, and education expenses.
• It’s used to determine your eligibility for various tax credits and deductions.
• AGI is calculated before subtracting standard or itemized deductions.

Net income

• Net income is the amount you receive in your paycheck after all deductions.
• It’s your gross income minus taxes, insurance premiums, and other withholdings.
• It reflects the actual amount available to you for spending and saving.

Do I pay taxes on gross or net income?

You pay employment taxes on your gross payroll income. However, the actual amount of your annual federal tax is calculated based on your taxable income, which is your AGI, after other specific deductions.

Understanding gross income and net income, and the differences between the two, is important for both short-term and long-term financial planning. Have questions or concerns? Work with a Tax Pro who can clear up these concepts and get you every dollar you deserve when you file your tax return.

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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