Gross income: the number on your tax return before anything is taken out.
Gross income is the total amount of money earned (or unearned) from all sources before any deductions. For employees, it typically includes:
- Salary
- Hourly wages
- Bonuses
- Overtime
- Commissions
- Tips
For self-employed people, it’s total business revenue before expenses.
Other sources the IRS counts as gross income include:
- Interest
- Dividends
- Rental income
- Side gig earnings (including hobby income)
For the full list of what the IRS includes, see IRS Publication 17, Your Federal Income Tax.
A Simple Example
Someone earns $70,000 in wages during the year. That $70,000 is gross income. If they contribute $3,000 to a traditional 401(k) and claim the standard deduction, their taxable income will be well below $70,000, because both of those reduce the amount subject to tax. Their gross income didn’t change, but their taxable income did.
Comparing gross income, net income, and taxable income
| Term | Definition | Where you see it | Used for |
|---|---|---|---|
| Gross income | Total earnings before any deductions (tax return & payroll) | Pay stub, tax forms | Comparing salaries, starting point for your tax return |
| Net income (paystub) | Take-home pay after all deductions | Bank deposit, net pay line on pay stub | Day-to-day budgeting and spending decisions |
| Taxable income | Gross income minus specific above-the-line deductions (difference is Adjusted Gross Income (AGI) and below the line deductions | Form 1040 | AGI: IRS credit and deduction eligibility, Roth IRA limits, ACA subsidies TI: Amount of income taxed |
Example of the difference in gross income and net income for paychecks:
Net income is gross income minus all payroll deductions. Here’s what the chain typically looks like for someone earning $5,000 per month:
| Pay or deduction | Example amount | Running total |
|---|---|---|
| Gross pay | $5,000 | $5,000 |
| Federal income tax withholding | - $540 | $4,460 |
| State income tax withholding (varies by state) | - $175 | $4,285 |
| Social Security tax (6.2%) | - $310 | $3,975 |
| Medicare tax (1.45%) | - $73 | $3,902 |
| Health insurance premium | - $200 | $3,702 |
| 401(k) contribution | - $250 | $3,452 net |
Note: Your W-2 may report different amounts of wages in Boxes 1, 3, and 5. These amounts may differ because some pre-tax deductions affect federal income tax, Social Security, and Medicare wages differently.
