Part of the confusion behind understanding gross and net income is there are different meanings depending on if you are talking about a business or wages. In this article, we dive into both scenarios and provide examples for each.
When talking about wages, gross income is the amount of money paid to the employee before deducting taxes. A wage earner’s net income is the earnings after all taxes and deductions have been withheld from the gross income.
Wage example of gross and net income:
Let’s say a person receives a wage of $3,000 a month. Before he or she can pocket that sum of money, they have to withhold the proper amount and accommodate for deductions such as Medicare and FICA.
To keep it simple, let’s assume this amount is $1,000 with all the taxes taken into account. The person's gross income is $3,000 and their net income is $2,000 ($3,000 less $1,000).
Gross and net income for a business
When addressing gross income for a company or business, it’s another term for gross margin, or sales minus the cost of the goods sold. Gross income is another way of saying gross profit.
Net income is the earnings of a company after all expenses have been taken into account. Net income is the same as net profit.
A business has sales $500,000, cost of goods sold of $100,000, and selling expenses of $50,000. The business’s gross income is $400,000 ($500,000 less $100,000) and its net income is $350,000 ($500,000 less $150,000).
Gross and net income can be puzzling, but just keep in mind that there are different meanings for a business scenario and wage scenario. Also, you can’t get your net income without first knowing your gross income. Even large companies can get these terms and the payroll process confused. For this reason, employers use payroll withholding software to create efficiency and accuracy in the process.