Gross Income Vs. Net Income: What's The Difference?

Individuals can make money in a number of different ways: through wages, which are calculated hourly, weekly, or monthly; through sales, bonuses, tips, royalties, or commissions earned; or even through investments in stocks and bonds, as well as interest from savings accounts. Money can also be made when you have an asset that you let another person use in exchange for cash — like the rental of a house or a car (or other means of transportation).

No matter what a person's different earning streams are, the amount you get by adding the money you make is your income. But for accounting purposes, income is viewed in two ways — as gross income (or before deductions) and as net income (after deductions), and each type of income depends on how your wages are calculated. Knowing what your gross and your net incomes are is especially important when you're trying to plan out your budgets.

Gross income explained

When all the amount of money you earn, regardless of how it's made, is added up (before deductions, including taxes), the resulting sum of all those parts is your gross personal income. Bankrate offers up the example of an hourly wage earner who works out gross income by taking an hourly salary rate and multiplying that by the number of hours earned. 

Gross income may be a bit more difficult to figure out when you're a member of today's gig economy, but all you need to remember is that money earned through different part-time, temporary, or freelance jobs all add up to become your gross income. American Express also says it's important to know what your gross income is because it plays a role in helping you figure out whether or not you qualify for a loan or are able to rent the apartment of your dreams. Gross income also impacts the limits of your credit and how you might approach negotiating your salary for a new job.

But gross income is calculated a bit differently when you're an entrepreneur because as a small business owner, your gross income represents the total amount of money you might have made from sales of goods and/or services within a specific amount of time, and without any deductions.

Net income explained

Let's face it: When we earn a wage, a part of that will always be held back by the company you work with in order to cover your tax bill; there will also be deductions that can include Social Security, Medicare, possible loan payments, as well as health insurance. The amount that's left after all that's deducted represents your net income — and that's the money you're left with to budget for living and savings. Net income is important because this figure more accurately encapsulates how much cash you really have on hand to spend. In short, this is your take-home pay. 

Just like gross income calculations are different for small business owners, net income is computed in a different way for entrepreneurs, too. Net income is what you have left after taking the sales total and deducting expenses like wages, cost of inventory, rent, and utility. The amount of money a business owner is left with is considered "profit," and it's a critical figure for business owners to know, because it measures how well the venture is actually doing.