Gross Earnings: Definition, Examples, and How It Differs from Net Income Gross earnings is the total income earned over a period before certain deductions. The meaning depends on context — for individuals it’s pre-deduction pay; for businesses it typically refers to gross profit after subtracting cost of goods sold (COGS) from revenue. Gross earnings for individuals
* Definition: Total pay or income before payroll taxes, income tax withholding, retirement contributions, health insurance premiums, and other payroll deductions.
* Where it appears: The first line on a pay stub or employment income statement.
* Example: If your annual salary is $100,000, that is your gross income. After taxes and deductions your take‑home pay (net income) will be lower.
Gross earnings for businesses (gross profit)
* Definition: Revenue minus cost of goods sold (COGS). Also called gross profit.
* What COGS typically includes:
* Direct materials used to make products
* Inventory costs for retailers
* Direct labor involved in production
* What COGS excludes:
* Indirect or operating costs (utilities, rent, administrative salaries, loan payments, etc.) — those are subtracted later to get operating income and then net income.
* Where it appears: On the income statement, usually shown after revenue and COGS.
* Basic formulas:
* Gross earnings (gross profit) = Revenue − COGS
* Gross margin = Gross earnings ÷ Revenue
Gross earnings vs. Adjusted Gross Income (AGI) and Net Income
* Gross income vs AGI (personal taxes): Gross income includes all income sources (wages, business income, rental income, interest, alimony, etc.). AGI is gross income minus allowed above‑the‑line deductions (e.g., certain educator expenses, allowable IRA contributions, eligible moving expenses). Taxable income is AGI minus the standard deduction or itemized deductions.
* Gross income vs net income (business): Gross profit is revenue less COGS. Net income is gross profit minus all other business expenses, interest, and taxes.
Examples
* Individual: Mr. Z earned $50,000 in a year. After $10,000 in taxes and payroll deductions, his gross earnings remain $50,000 and his net earnings are $40,000.
* Business: Company X has $2,000,000 in sales and $500,000 in COGS. Gross earnings = $1,500,000. After $300,000 in additional operating expenses, net income = $1,200,000.
Quick FAQs
* Is total gross income your salary?
Yes — gross income is your salary or total pay before taxes and payroll deductions.
* Does gross profit include tax?
No — gross profit excludes taxes, interest, and indirect operating expenses; it only accounts for direct costs (COGS).
* Why does gross earnings matter?
For individuals, lenders and credit evaluators use gross income to assess repayment ability. For businesses, gross earnings and gross margin indicate how efficiently a company produces and prices its goods relative to direct production costs.
Key takeaways
* Gross earnings measure total income before deductions; meaning differs for individuals and businesses.
* For individuals: gross earnings = pay before payroll taxes and other withholdings.
* For businesses: gross earnings (gross profit) = revenue − COGS; operating and other expenses are deducted afterward to get net income.
* Gross earnings are a basic but important metric used in budgeting, tax preparation, lending decisions, and profitability analysis.
Explore More Resources