Gross income: what it means on a paycheck and a budget

What gross income means

Cambridge Dictionary defines gross income as the total amount of a person's income in a period before tax is paid on it. The CFPB puts it the same way when it explains debt-to-income ratios: the amount you have earned before your taxes and other deductions are taken out.

For most employees, gross income is wages, salary and tips. The IRS notes that this includes amounts withheld from your pay for taxes, such as income tax, Social Security and Medicare, in the year they are withheld. You earned that money, even though you never see it.

Where to find it

Your pay stub shows gross pay for the period at the top, and often a year-to-date total. Your offer letter or salary is the yearly version. If you are paid hourly, multiply your rate by your hours.

Gross income is the number the CFPB uses in a debt-to-income ratio: your monthly debt payments divided by your gross monthly income.

Gross income vs net income, and which to budget on

Net income is what is left after tax and the other deductions. Bills are paid out of net, so a budget built on gross comes up short every month. Budget on the money that lands, and use gross only when a form asks for it.

For a couple, it is worth looking at both. Gross shows who earns what. Net shows what you actually have to share, which is the better base for splitting rent.

A worked example: $65,000 a year, single, paid every two weeks

• Gross income for the year: $65,000.
• Gross income per paycheck: $65,000 / 26 = $2,500.
• Social Security and Medicare come out first: 6.2% + 1.45% = 7.65%, so $2,500 x 0.0765 = $191.25.
• Federal income tax and the rest bring the take-home to about $2,093 (our paycheck calculator, before state tax).
• Total held back per paycheck: $2,500 - $2,093 = about $407.