Gross Income and Net Income: What’s the Difference?

What Is Gross Income?

Gross income is all the money you earn before any deductions are taken out. It can come from a variety of sources, including:

• Wages, salaries, tips and bonuses
• Side business or freelance income
• Investment returns, including interest, dividends and capital gains
• Real estate income, such as rental payments or property sale proceeds
• Retirement and pension payments
• Social Security and other government benefits
• Gifts, inheritances and prize winnings

If you receive a regular paycheck, your gross income is listed on your pay stub, along with a breakdown of any deductions taken out. It's also included on the W-2 form you receive each year to file your taxes.

Other income sources, such as freelance work, investments or rental income, come with their own tax documents, though taxes on that income may or may not be withheld automatically.

Learn more: What Qualifies as Taxable Income?

How to Calculate Gross Income

Gross income is typically expressed on an annual basis. To calculate yours, multiply the gross pay amount shown on your pay stub by the number of paychecks you receive per year:

• 52 if you're paid weekly
• 26 if you're paid biweekly
• 24 if you're paid twice a month
• 12 if you're paid monthly

Example: Joe is a high school teacher who earns $45,000 per year and gets paid twice a month (24 times per year). His gross pay per paycheck is $45,000 / 24 = $1,875. To find his monthly gross income, he doubles his twice-monthly pay: $1,875 x 2 = $3,750.

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What Is Net Income?

Net income is the amount of money you take home after all deductions are subtracted from your gross pay. Common deductions include:

• Federal, state and local income taxes
• Social Security and Medicare taxes
• Health insurance premiums
• Retirement plan contributions
• Wage garnishments

If you receive a regular paycheck, the amount deposited into your bank account each pay period is your net income for that period.

How to Calculate Net Income

To find your annual net income, multiply your per-paycheck net pay by the number of paychecks you receive per year. For example, Joe's gross pay is $1,875 per paycheck, but he has the following deductions each paycheck:

• Retirement savings: $112
• Health insurance premiums: $50
• Health savings account contributions: $50
• Federal and state income taxes: $229
• Social Security and Medicare taxes: $143

In total, Joe's deductions amount to $584. To get his net income, you'll subtract that from $1,875, giving you a result of $1,291. You can then multiply that by 24 to get an annual net income of $30,984.

How Gross Income and Net Income Can Affect Your Budget

Understanding the difference between gross and net income matters most when you're building a budget. Since your net income is what you actually have available to spend, it's the right figure to use as your baseline.

Say Joe from the above examples wants to spend no more than 30% of his income on rent. If he bases that on his gross monthly income of $3,750, he'd budget $1,125 for rent, which is nearly a full deposited paycheck. But if he bases it on his net monthly income of $2,582, he'd budget $775, which is a much more realistic figure.

In general, budgeting with your net income leads to more accurate and sustainable financial planning.

Tip: When you apply for a mortgage or other large loan, lenders often use your monthly gross income to calculate your debt-to-income ratio (DTI). Keeping that ratio low improves your chances of approval.

Frequently Asked Questions

Know Your Numbers, Build a Better Budget

Understanding the difference between gross and net income gives you a clearer picture of your finances. It can also help you make smarter decisions when budgeting, applying for a loan or filing your taxes.

As you manage your money, staying on top of your credit health matters just as much. You can check your credit report and FICO^® Score^Θ for free through Experian to keep your full financial picture in view.