A guide to calculating gross income

Do you remember looking at your first paycheck and were discouraged to see your take-home pay was far less than you thought? This is potentially where you were first introduced to the term “gross income”. Or, you might have first heard about it when applying for a loan or credit card. Either way, you probably questioned what this term means as it relates to your net income. This post will help you better understand the meaning of gross income and calculate it. Read on as we dive into the details of determining gross pay…

What is gross income?

In short, gross income is a person’s total earnings prior to taxes or other deductions. It includes all income received from all sources: including money, property, and the value of services received.

Gross income is reduced by adjustments and deductions before taxes are calculated. It’s different than the terms “net income” and “net pay,” which we’ll describe below.

Why is understanding gross income important?

Your gross income calculation is important for a number of reasons:

1. It’s an important figure to help you calculate the total tax you owe and eligibility for tax credits and deductions.

Gross income is the starting point to determine your taxable income and to calculate adjusted gross income and modified adjusted gross income.

· It helps you determine your adjusted gross income (AGI). Your AGI is used for several tax return formulas, including determining your eligibility for certain tax credits and deductions.  In short, AGI is your gross income minus adjustments to your income.

· It helps you determine your modified adjusted gross income (MAGI), which is another important figure for tax purposes. MAGI is similar to AGI, plus a few items added back in, such as – like exempt income, IRA contributions, and more.  And like AGI, it’s used to figure out your eligibility for certain tax credits and deductions.

2. It helps you determine your take-home pay.

What is take-home pay? Your take-home pay, or net income is the total amount after taxes and deductions you take home from your paycheck. If your only income comes from a W-2 job, your employer will withhold any applicable taxes based on your Form W-4, state income tax, Medicare and Social Security tax – plus they’ll withhold any amounts for benefits such as insurance. What’s leftover is often what most people think of as take-home pay, or net income.

3. It’s a number that reflects your financial standing.

Gross income is often used for loan qualification. Because this figure is used to reflect your financial standing, it’s used by lenders to see if you can meet a certain requirement when deciding to extend a loan to you. In addition, it helps landlords of rental properties determine if you’ll be able to pay for your rent.

4. It helps determine your credit limit.

If you use credit cards, creditors may use your gross income to determine your total credit limit. Want more info? Get guidance on building credit.

How to calculate gross income (by year)

Here is a step-by-step guide to calculate gross income by year for those with primarily W-2 income. (Please note there are a few gross income formulas.)

1. Calculate total W-2 income

Gather every paycheck from the year. (It should be around 26 total if you have a bi-monthly pay period.) Then, look at every paycheck for the “gross income” or “gross pay” lines. Tally the amount from each pay period to come up with the total amount. You can also calculate the total gross income in a tax year by multiplying your hourly rate by the hours worked.

2. Sum additional sources of income

Income can come from many other places outside of traditional W-2 wages. So, you want to factor those additional sources of income in your gross income calculation. Alimony, investment income, capital gains, wages, tips, interest, dividends, rental income, freelance work, and pension income are examples of sources that could contribute to your total gross income.

3. Add all income sources together

Combine your W-2 job with your other income sources to arrive at your total gross income.

Here are a few examples of calculating yearly income:

A. Lucy has a yearly annual salary of $50,000 per year as a teacher. She generates an additional $1,000 in stock dividends, gets $10,000 in alimony payments, and an additional $5,000 from pension income. Her gross annual income is $66,000.

B. Marcos has a yearly annual salary of $60,000 per year as a graphic designer at an agency as a W-2 (or salaried employee). He receives an additional $25,000 in independent contractor payments and an additional $10,000 per year from income generated from a rental property he owns. His gross annual income is $95,000. As stated earlier in this post, your taxable income calculation is a bit more involved as you have to weigh in tax deductions and credits. Find details for calculating taxable income.

How to calculate your monthly gross income from a year’s salary

Take your yearly income and divide it by 12 to arrive at your gross monthly income. The calculation looks like this:

Gross monthly income = gross annual income / 12

How to calculate gross monthly income

You can calculate gross monthly income similarly to gross yearly income. Follow these steps to determine gross pay:

1. Add up W-2 wages for the month

Tally up the gross pay or income listed on each of your paystubs for a given month.

2. Sum additional sources of income

Add in additional sources of income in your gross monthly income calculation, factor in additional payments. Alimony, investment income, capital gains, wages, tips, interest, dividends, rents, freelance work, and pension income are examples of sources that could contribute to your total gross income.

3. Add the total income together

Add your income sources together to arrive at your total gross monthly income.

Need help understanding your income taxes? Turn to H&R Block

Your gross monthly income is an important number for understanding your tax obligations.

H&R Block can help you determine your taxable income and more. Whether you make an appointment with one of our knowledgeable tax pros or choose one of our online tax filing products, you can count on H&R Block to help you navigate your taxes.