Gross income is income before taxes, expenses, and other applicable deductions. Net income is the amount remaining after those costs have been deducted. If you earn $5,000 in gross income and have $1,500 in deductions, your net income would be $3,500.
What Is Gross Income vs. Net Income?
The main difference between gross income and net income is whether expenses and deductions have already been taken into account.
Gross Income
Gross income is the amount earned before applicable taxes, payroll deductions, operating expenses, or other costs are subtracted.
Net Income
Net income is the amount left after applicable costs and deductions have been removed from gross income or revenue.
For an employee, gross income typically refers to salary, wages, bonuses, commissions, and other earnings before deductions. Net income is closer to the amount actually available after payroll deductions.
For a business, gross and net income can refer to different stages of profitability. Net income is generally the final profit remaining after applicable expenses, interest, and taxes have been deducted.
How Do Gross Income and Net Income Work?
Think of gross income as the starting point and net income as the ending point. Money begins with total earnings or revenue, and then deductions reduce that amount.
For employees
An employee may have a stated annual salary of $60,000. That $60,000 is the employee's gross salary before payroll deductions. Taxes, insurance premiums, retirement contributions, and other deductions reduce the amount ultimately paid to the employee.
For self-employed workers
A freelancer or independent contractor may receive $80,000 from clients during the year, but that does not necessarily mean they have $80,000 available to spend. Business costs, taxes, software, insurance, and other expenses can reduce the amount they ultimately keep.
For businesses
A business may generate substantial revenue while still producing relatively little net income if its expenses are high. This is why revenue alone does not tell you how profitable a business is.
How to Calculate Gross Income and Net Income
The exact formula depends on whether you are calculating personal income, paycheck income, or business profit. The general relationship is straightforward.
For an employee, applicable deductions might include:
- Income-tax withholding
- Payroll taxes
- Health insurance premiums
- Retirement contributions
- Other authorized payroll deductions
For a business, deductions may include:
- Cost of goods sold
- Employee wages
- Rent and utilities
- Software and subscriptions
- Marketing and advertising
- Interest
- Taxes
- Other operating expenses
Worked Example
Suppose an employee earns $6,000 per month before deductions.
Gross monthly income: $6,000
Taxes and withholding: $1,000
Health insurance: $250
Retirement contribution: $400
Other deductions: $50
Total deductions: $1,000 + $250 + $400 + $50 = $1,700
Net income: $6,000 − $1,700 = $4,300
Gross income: $6,000 | Net income: $4,300Gross Income vs. Net Income Comparison
| Category | Gross Income | Net Income |
|---|---|---|
| Definition | Income before applicable deductions | Income remaining after applicable deductions |
| Employee example | Salary or wages before deductions | Income after payroll deductions |
| Business example | Income before certain expenses | Profit after applicable expenses |
| Usually higher? | Yes | No |
| Useful for | Comparing earnings and compensation | Budgeting and evaluating actual profitability |
| Main question answered | “How much did I earn?” | “How much is left?” |
Factors That Affect Gross and Net Income
Gross income can change when your earnings change, while net income can also change because of deductions and expenses. The following factors can affect the difference between the two.
Raises, overtime, bonuses, commissions, or fewer working hours can change gross income.
Income taxes and payroll taxes can materially reduce the amount remaining after gross income.
Health insurance and other employee benefits may be deducted directly from a paycheck.
Contributions to retirement accounts can reduce current take-home pay while supporting longer-term savings.
Rent, payroll, materials, software, advertising, and other costs can reduce a business's net income.
Interest on loans or other financing can reduce the final amount remaining after expenses.
Common Mistakes
Gross and net income are simple concepts, but they are often confused in budgeting, salary comparisons, and business analysis.
Budgeting with gross income.
Building a spending plan around your full salary can overstate how
much money you actually have available each month. Net or take-home
income is usually more useful for day-to-day budgeting.
Assuming the same salary means the same take-home pay.
Two employees with identical salaries may have different net pay
because their taxes, benefits, and retirement deductions differ.
Ignoring the time period.
Do not compare a monthly net figure with an annual gross figure.
Convert both amounts to the same period first.
Confusing revenue with business profit.
High revenue does not automatically mean high net income. A
company may generate large sales but have substantial expenses.
Frequently Asked Questions
Is gross income before or after taxes?
Gross income is generally measured before applicable taxes and other deductions are taken out. Net income reflects the amount remaining after relevant deductions have been applied.
Is net income the same as take-home pay?
They are closely related in personal finance, but not always identical in every context. Take-home pay usually refers to the amount actually deposited after payroll deductions. Net income can be used more broadly for individuals and businesses.
Why is gross income higher than net income?
Gross income is calculated before deductions, while net income is calculated after deductions. Taxes, insurance, retirement contributions, operating expenses, and other costs reduce the final amount.
Which income should I use for a monthly budget?
For most household budgets, take-home or net income is more useful because it reflects the money actually available to spend, save, and use for financial goals.
Can net income ever be higher than gross income?
Under the standard gross-versus-net relationship, net income is normally lower because it is calculated after deductions. If additional income or reimbursements are introduced into a separate calculation, the comparison may differ, so make sure both figures refer to the same income source and time period.
Use the MoneyMetric Net Income Calculator
Enter your gross income and deductions to estimate the amount you may have left after taxes, contributions, and other applicable deductions.
Calculate Net Income →