What is Gross Income?

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If you work you have an income. When you receive pay for the hours worked taxes have already been taken out. What you receive is commonly referred to as your net income. The total amount before taxes is commonly referred to as gross income. For many, this is all they know about gross income. However, this is not all-inclusive of what gross income is. Depending on the situation the words "gross income" can take on a different meaning. Read on to learn more.

 

 

What is Gross Income?

 

Simply put gross income is the amount of money made before taxes and expenses. However, gross income can be viewed differently from one person to the next. For example, in the case of loans a self-employed person will have their gross income viewed in a different light than that of a W2 employee. Net income is adjusted income after expenses, taxes, or both. It depends on the circumstance case by case.

 

How Does the IRS View Gross Income?

 

The Internal Revenue Service refers to what gross income is as all money, goods, property, and services received by a person in a given tax year. Again, this is a different treatment for gross income than you will see with other entities. For example, a lender is not going to view the property you were given as income for a loan. It will be viewed as assets, however. There are clear differences between the IRS and lenders in the way that gross income is viewed.

 

How is Gross Income Treated Differently between Self-employed and W2 Workers?

 

The IRS does not treat the two differently in terms of what is counted as gross income. Lenders do, however. A W2 employee has all of their income counted without regard for taxes or expenses written off at the end of the year. Self-employed persons do not have taxes counted against them but expenses deducted are. For example, if a person has $50,000 in income but writes off expenses totaling $10,000, then only $40,000 of the income is counted. If the person were W2 employed, all the income would count.

 

Why is There Such a Difference?

 

The IRS wants to tax you on all forms of financial gain regardless of type. Lenders only want to know what kinds of inflows that a person has. Receiving property will not in itself pay the loan payments. Self-employed people are seen as riskier due to the sometimes uncertain nature of self-employment. Additionally, some people inflate or deflate their income. Lenders want to see if a person does this so they can properly assess the actual cash flows. In the end the methods may not be ideal.

 

Is There anything else a Person Should Know about Gross Income?

 

A person simply needs to be aware of the difference in the way gross income is treated. Understand that even among the same industry type, say lenders, gross income can be treated differently. For example, if you are applying for certain home loans some income may not be counted. If you have unemployment income it is generally not considered in home loans but might be for a car loan. If you have a second job and have been there less than a year the income may not be considered part of your gross income. However, it might be considered a compensating factor. Ask questions and understand the guidelines for the specific lender, the IRS, or any other group you may be working with.

 

 

The financial world in the United States can be a confusing one. The treatment of gross income is just one example of this fact. Complex financial products and reselling of loans, among other aspects, make it even more confusing. When there are questions in your mind, ask them. It is better to ask simple questions and be informed than to assume and be mistaken. That can make a difference in financial decisions for and against you. Always try to be as informed as possible when it comes to what counts as gross income and other financial areas that apply to you.