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Gross vs Net Income: Understanding the Bottom Line

net income vs gross income

This is the figure that results when you subtract withholding taxes, benefits, and other deductions from your gross salary. Businesses use the gross earnings to indicate the amount of revenues left over at the end of a period that can be used to cover the operating expenses. It’s a little confusing because usually when you hear the word gross, you think total. This is reported near the top of the income statement and is an intermediate step in computing the net profit for the year. Understanding the significance of these differences is essential for both individuals and businesses. Gross income is useful for evaluating revenue streams and assessing the potential for increasing earnings.

net income vs gross income

The more money that you have withheld for taxes from your paycheck, the lower your net income will be. However, this may help minimize the possibility of your owing additional money to the federal or local government come tax season. When people compare earnings and salary, they often do so by comparing the gross income, and net income isn’t considered. One reason for this is that your gross income is the best indicator to compare the amount of money paid for a particular job or position. The amount of deductions or taxes withheld can vary greatly depending on a person’s situation. If you are an hourly employee, then your gross income will depend on the total number of hours you work and your hourly wage.


As seen before with Best Buy, Macy’s gross profit of over $2.2 billion dramatically differs from its net income. Due to SG&A costs, settlement charges, interest expenses, impairment and restructuring costs, and income taxes, Macy’s net income for the period was just $108 million. Business owners and managers use gross profit information to assess the profitability of their core business operations. Though business owners use net income, select department leads will be more specifically interested in how the actual product manufacturing and sales perform without considering administrative costs. For example, if a company didn’t hire enough production workers for its busy season, it would lead to more overtime pay for its existing workers. The result would be higher labor costs and an erosion of gross profitability.

net income vs gross income

Net income, on the other hand, is a much better number for tracking the profitability of a business, or how much money the company is making (or losing) over given periods of time. Net income doesn’t tell owners or managers whether their sales are going up or down, but it does help them identify ways to improve their business (such as by growing sales or cutting expenses). Next, limit your needs category to expenses like groceries, rent or mortgage payments, utilities, health insurance, necessary transportation expenses and medicine. Although the final 20% is for your savings and debt payments, the minimum monthly payment for any debt you have should go into the needs category. If you don’t make the minimum monthly payment on your debt, it could negatively impact your credit score.

Content: Gross Income Vs Net Income

Many employers offer retirement plans where you can contribute by having deductions made from each paycheck. Some of these contributions are pretax, giving you the advantage of saving for retirement while lowering your tax liability. If you receive an hourly wage, you can calculate your gross income by multiplying the number of hours worked in your payroll period by your hourly wage. When you see the words “gross” and “net” in financial statements, think of gross as the whole amount and net as the amount remaining after parts of the gross amount are subtracted. One example of the two terms is gross income (business income before deductions) and net income (business income after deductions).

Also, one person might contribute, say, 10% of their salary to a company-sponsored retirement plan while another chooses not to. For a firm engaged in manufacturing or mining business, the meaning of gross income is different. For them, it is the result of sales less the cost of goods sold (direct expenses related to purchasing or production), plus any income from investment and from outside operations.

Users of Gross Profit vs. Net Income

It is important to know what your salary is, and to know how much tax you’ll be paying on what you earn. This sum equals the base salary plus benefits and allowances including overtime pay, medical expenses allowance, travel insurance and home allowance. Basically, the gross income is the same without any deductions, and the net income is the same with deducations in place. These may include your monthly grocery bill, gas for your car, credit card bill and any other costs that are typically variable. Comparing the net incomes of two different businesses doesn’t tell you much either, even if they are in the same industry.

  • Net income is also a relevant number for investors as it’s used to determine a company’s earnings per share .
  • The net income would be $350,000 which represents net profits after all deductions and expenses are taken out.
  • Net income is the profit that remains after all expenses and costs have been subtracted from revenue.
  • Business owners and managers use gross profit information to assess the profitability of their core business operations.
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