Gross income

Gross income is the number on the offer letter and at the top of the pay stub, and it is the largest figure your pay is ever quoted at. A $74,400 salary is $6,200 a month gross, and the pay that follows it into the account is $4,400 once income tax withholding, Social Security and Medicare, a retirement contribution and a health premium have come out. The rules other people measure you by, a landlord's rent ceiling and a lender's debt-to-income ratio, are set on gross income, while a budget has to run on take-home pay, and in the example the two are $1,800 a month apart. Which figure a rule means is the first thing to check before applying it.

In a sentence

• "The lease application asks for gross income, so the figure to write down is $74,400 a year, not the $52,800 that reaches the account."
• "A lender qualifies you on gross income; the budget has to run on take-home pay."
• "For a freelancer, gross income is what the clients paid, before expenses and before the tax set-aside."

How it's calculated

Gross income = pay before any deduction + every other source of income

For a salaried employee, gross pay for a period is the annual salary divided by the number of pay periods: $74,400 a year is $6,200 a month, or $3,100 twice a month. For an hourly employee it is the rate times the hours, with overtime at its higher rate: $25 an hour for a 40-hour week is $1,000 gross, and $52,000 across 52 weeks. Bonuses, commissions, tips and overtime are gross income in the period they are paid, and they are withheld on like the rest.

Income from anywhere else counts the same way, before its own costs.

What comes out between gross income and take-home pay is income tax withholding, federal and state, Social Security at 6.2% and Medicare at 1.45%, pre-tax benefits such as a 401(k) contribution and a health premium, and any after-tax deductions.

An example

A $74,400 salary, shown as one month of pay.

The common rules then read against one figure or the other.

A rent at the ceiling, $1,860, is 30% of gross income and 42% of take-home pay. It leaves $2,540 a month for everything else and puts the needs share past its own ceiling before utilities and groceries are counted. Neither rule is wrong; they are on different bases, and the gap between the bases is the $1,800 of deductions.

Why it matters

Gross income is the figure the outside world measures you by, and the figure the tax is computed on; take-home pay is the figure you can spend. The decision it changes is which number to plan on, and the mistake it prevents is planning on the wrong one: a $5,000 raise read as $417 a month of new room when a good part of it goes to withholding, or a rent that clears the 30% rule and still consumes two fifths of the money that arrives. It also settles what a lender sees. A debt-to-income ratio is computed on gross monthly income, so a household that has sized its budget on take-home pay has more borrowing room by the lender's arithmetic than by its own, which is not the same as having the money.

Gross income versus take-home pay

Gross income is what you earn; take-home pay is what you receive, after every tax and deduction. The pay stub shows both, the top line and the bottom line, and in the example the two are $1,800 a month apart, 29% of gross, a share that moves with the state, the retirement contribution and the benefits chosen. The self-employed have a third figure between them, net income after business expenses, which is what their tax is computed on and what a salary paid from the business is sized from.

Common questions

Is gross income the same as taxable income? No. Taxable income is gross income after the adjustments and deductions the tax code allows, such as retirement contributions and the standard deduction, and it is the figure the tax rates are applied to. The IRS sets the deduction amounts, and they change most years.

Is gross income before or after 401(k) contributions? Before. A traditional 401(k) contribution comes out of gross pay and lowers the wages income tax is withheld on, which is why the wages figure on a W-2 reads lower than the salary. A lender or landlord still counts the full gross.

Should I budget on gross income or take-home pay? Take-home pay, because it is what arrives. Gross income matters when someone else is measuring you and when the tax is computed; the month runs on the money in the account.

What is gross income for someone self-employed? What the clients or customers paid, before business expenses and before anything is set aside for tax. Net income, after expenses, is the figure the tax is computed on and the one to size a personal budget from.

Does gross income include a bonus? Yes, in the period it is paid, and it is withheld on like other wages, so it lands smaller than it was announced.

Go deeper

• The Budget calculator splits monthly take-home pay, not gross, into needs, wants and savings with the 50/30/20 rule or shares of your own, and shows the dollar amount each bucket gets.
• What percentage of your income should go to rent, food, and savings sets out which of the common rules are measured on gross income and which on take-home pay, and what gives way when rent runs above the rule.
• The Mortgage calculator estimates the full monthly payment on a home, principal and interest plus property tax, insurance, HOA dues and PMI, and its guide keeps that payment at or under 28% of gross monthly income.