102 LearnersLast updated on June 4th, 2025
Gross vs Net Income
Gross income and net income can be confusing for many. These are two kinds of income an individual, company, or business earns. A clear understanding of these terms will help both individuals and companies with money management, taxation, and settling salaries. Let us now learn how to use them correctly without getting confused.
What is Gross Income?
Gross income refers to the total amount of income an individual earns. It might be in cash, retirement funds, and other allowances. It includes all monetary and non-monetary benefits received by an employee from their employer, without any deductions.
Gross income helps businesses estimate their revenue. It can be mathematically represented as:
Gross income = Revenue - Cost of goods sold.
What is Net Income?
Net income is the amount that is received by an individual or a company after all deductions are made. For individuals, net income refers to the in-hand or take-home salary, whereas for businesses, net income represents their profit.
Employees receive a net income only after all the payroll deductions have been made. A few common deductions are taxes, health insurance, and pensions.
Net income can be calculated as:
Net income = Total revenue - Total expenses
OR
Net Income = Gross Income - Business Expenses + Other Income.
Difference Between Gross and Net Income
Learning the difference between gross and net income helps one make financial decisions wisely. Let’s take a look at a few:
|
Gross Income |
Net Income |
|
It is the total earnings of an individual or company before deductions. |
It is the total amount earned by an individual or company after deductions. |
|
Amount before tax deduction |
Amount after tax deduction |
|
Formula to calculate: Gross income = Revenue - Cost of goods sold |
Formula to calculate: Net Income = Gross Income - Other Business Expenses + Other Income |
|
Higher than net income |
Lower than gross income. |
Tips and Tricks for Gross vs Net Income
Gross income and net income are of a significant importance and it is used in various fields. However, some people find them confusing. Let’s now look into some tips and tricks that may help them and make it less confusing:
- Always remember that the bigger number will always be the gross salary, and the actual amount you receive is your net salary.
- For quick calculations, you can use the formulas:
- Gross Income = Revenue - Cost of Goods Sold (COGS)
- Net Income = Gross Income - (Operating Expenses + taxes).
- Always understand your net income to plan your expenses; it should be within the net income.
- Make sure that you double-check the financial statements before calculating the income to always make sure that all deductions are correctly recorded.
- Understanding both concepts without mixing them up helps employees in self-evaluating their earning potential and negotiating for a salary hike.
Real-World Applications of Gross vs Net Income
There are many real-life applications for gross and net income. Understanding them enables individuals and companies to maintain financial stability. We will now learn how they apply:
- Net income helps us understand how much we earn, our monthly expenses, and our savings.
- Employees can make financial decisions like salary negotiations by understanding their gross and net income.
- Determining the net income helps individuals set aside money for tax, rent, and other expenses.
- Businesses can understand their profitability by calculating their net income.
- Investors can make use of their knowledge about gross and net income to evaluate the financial wealth they have before making their investments.
Common Mistakes and How to Avoid Them in Gross vs Net Income
Gross income and net income help us in handling finances in different ways. However, students frequently make some common mistakes while handling their finances. Let’s look at a few common mistakes and the methods to avoid them:
Mistake 1
Confusion between Gross and Net Income
Ensure that you learn the correct definitions of these terms with examples. Net income is the actual in-hand salary of an individual, whereas the gross amount is the total income before deductions.
Solved Examples of Gross vs Net Income
Problem 1
Linty earns a monthly salary of $3,500. Calculate her net income after the following deductions: Tax: $400 Health insurance: $200 Labor welfare fund: $300
The net income is $2600
Explanation
Here, the total income (gross) is given as $3,500
We now calculate the total deductions: Total deductions = $400 + $200 + $300 = $900
To calculate the net income, we have the formula:
Net income = Gross income - Total deductions
Substituting the values:
Net income = $3500 - $900 = $2600
Therefore, the net income is $2600.
Problem 2
If a photographer earns $5,000 per month. Calculate net income after: Company costs: $1,500 Taxes: $1000
The net income of the photographer is $2,500
Explanation
Here, the total amount (gross) = $5,000
Total deductions = Company costs +Taxes
Total deductions = $1,500 + $1,000 = $2,500
Net income = Gross income - Total deductions
Substituting the values:
Net income = $5,000 - $2,500 = $2,500
Therefore, the net income of the photographer is $2,500.
Problem 3
Sandra works as a content creator with an annual salary of $60,000. In addition, she earns a yearly bonus of $2,000 and receives a rental income of $8,000 per year. What is her gross income?
$70,000
Explanation
Given that:
Salary = $60,000
Bonus = $2,000
Rental Income = $8,000
To calculate the gross income, we sum up all the expenses:
Gross Income = $60,000 + $2,000 + $8,000 = $70,000
Therefore, the gross income of Sandra is $70,000.
Problem 4
Angel is a baker who earns $200,000 in total revenue. The cost of goods sold (COGS) amounts to $45,000. Calculate the gross income.
The gross income of Angel is $155,000.
Explanation
To calculate the gross income, we use the formula:
Gross income = Total revenue - The cost of goods sold
Substituting the given values:
Gross income = $200,000 - $45,000 = $155,000
Therefore, the gross income of Angel is $155,000.
Problem 5
A clothing store earns $600,000 in sales revenue. The store's cost of goods sold is $250,000. Determine the store's gross income.
The store’s gross profit is $350,000.
Explanation
To calculate the gross income, we use the formula:
Gross income = Total revenue (sales) - The cost of goods sold
Substituting the given values:
Gross Income = $600,000 - $250,000 = $350,000
Therefore, the store’s gross profit is $350,000.
FAQs on Gross vs Net Income
1.State the major difference between gross income and net income.
2.Can the net income of an individual be higher than the gross income?
3.Is tax included in gross income?
4.Why do we calculate net income in businesses?
5.Can a company’s net income be negative?
6.How can children in Singapore use numbers in everyday life to understand Gross vs Net Income?
7.What are some fun ways kids in Singapore can practice Gross vs Net Income with numbers?
8.What role do numbers and Gross vs Net Income play in helping children in Singapore develop problem-solving skills?
9.How can families in Singapore create number-rich environments to improve Gross vs Net Income skills?
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Dr. Sarita Ghanshyam Tiwari
About the Author
Dr. Sarita Tiwari is a passionate educator specializing in Commercial Math, Vedic Math, and Abacus, with a mission to make numbers magical for young learners. With 8+ years of teaching experience and a Ph.D. in Business Economics, she blends academic rigo
Fun Fact
: She believes math is like music—once you understand the rhythm, everything just flows!
