What is the difference between gross and net income?

The concepts of gross and net income have different means, depending on whether you are discussing a business or a wage earner.

For a company, gross income equates to gross margin, which is sales minus the cost of goods sold. Thus, gross income is the amount that a business earns from the sale of goods or services, before selling, administrative, tax, and other expenses have been deducted. For a company, net income is the residual amount of earnings after all expenses have been deducted from sales. In short, gross income is an intermediate earnings figure before all expenses are included, and net income is the final amount of profit or loss after all expenses are included.

For example, a business has sales of $1,000,000, cost of goods sold of $600,000, and selling expenses of $250,000. Its gross income is $400,000 and its net income is $150,000.

For a wage earner, gross income is the amount of salary or wages paid to the individual by an employer, before any deductions are taken. For a wage earner, net income is the residual amount of earnings after all deductions have been taken from gross pay, such as payroll taxes and retirement plan contributions.

For example, a person earns wages of $1,000, and $300 in deductions are taken from his paycheck. His gross income is $1,000 and his net income is $700.

Similar Terms

Gross income and net income are also known as gross profit and net profit.

Related Topics

Income statement overview 
What is a profit and loss statement? 
What is a traditional income statement? 
What is a variable costing income statement? 
What is the operating profit margin?