Gross income, also known as gross pay or gross earnings, refers to the total amount of money that an individual earns in a given period of time before any deductions or taxes are taken out. Gross income includes all sources of income, such as wages, salaries, commissions, bonuses, self-employment income, rental income, and investment income.
For example, if an employee earns a salary of $50,000 per year and receives a $2,000 bonus, their gross income would be $52,000. If they also earn $1,000 in rental income and $500 in investment income, their gross income would increase to $53,500. Gross income does not take into account any deductions or taxes that may be applied to this income, such as income tax, social security tax, or Medicare tax.
Gross income is used as a starting point to calculate various types of taxes, such as income tax. In the United States, federal income tax is based on a progressive tax system, which means that individuals with higher gross incomes pay a higher percentage of their income in taxes. Each tax bracket has a specific range of income and a corresponding tax rate. For example, for the tax year 2021, individuals who earn less than $10,000 in gross income are taxed at a rate of 10%. Individuals who earn between $10,000 and $40,000 are taxed at a rate of 12%, and so on.
Gross income is also used to determine eligibility for certain benefits and credits, such as financial aid for education or the earned income tax credit. The earned income tax credit is a tax credit designed to help low- and moderate-income workers by reducing the amount of taxes they owe. To be eligible for the credit, individuals must have earned income from employment or self-employment and must meet certain income and filing requirements.
In addition to being used for tax purposes, gross income is also used to calculate an individual’s net income, which is the amount of income they have left after deductions and taxes have been taken out. Net income is often used to determine an individual’s ability to pay bills and make financial decisions. It is also used to calculate an individual’s net worth, which is the total value of their assets minus their liabilities.
Gross income is an important concept to understand when it comes to personal finance and tax planning. Knowing how much gross income you have can help you plan for future expenses and make informed financial decisions. It is important to keep track of your gross income and other financial information, as this can help you make informed decisions about your financial future.