Gross income and net income are similar terms that help explain different financial realities. In most cases, gross income is the total amount of money you make based on your work contract. Net income is what you see on your paycheck after taxes and deductions.
Gross income vs net income is thankfully one of the easier finance concepts to understand. They show up when dealing with personal finances, business finances and especially when doing your taxes.
You may have seen these two terms already and wonder, is net before or after taxes? What is the difference between net and gross income?
Gross income is the bigger amount, it’s your total salary before all the deductions for taxes and plans you pay into. Your net income (or the “after taxes” amount) is often smaller but is the real amount you receive after the accounting department is done.
Personal Income: Gross Vs Net on Your Paycheck
When you take the time to read your paystub, you’ll discover a gross amount and a net amount. When you get hired you agree to an income rate, this represents your gross income or gross pay. This is the amount of money the company pays you.
You may be salaried (paid an annual gross income), where the gross pay represents a yearly salary per year divided by the number of pay cycles. If you are paid per hour, your gross income is your hourly rate multiplied by the number of hours you worked.
Gross income is always before taxes and other deductibles. A good way to remember is that “G” comes before “N” in the alphabet.
Frequently Asked Question
Does my gross income or my net income matter to a mortgage lender?
Your gross income is what a mortgage lender in Canada cares about when figuring out how expensive a home you can afford. Be advised, your net income is what you’ll be using to make payments on that dwelling.
Before you receive your net income, there is financial action in play. Your gross income minus taxes, withholdings and, any other deductions equals the net amount on your paycheck.
Your net pay is what is written at the bottom of your paycheck, the take-home pay. When thinking of gross earnings vs net with regards to the amount deposited in your bank, it’s the net income that counts. The net amount is what you get when you cash a check or use direct deposit.
Frequently Asked Question:
What Deductions Must I Subtract from my Gross Income to Calculate My Net Income?
Depending on where you live, this list is subject to change, but there are many things that reduce your gross earnings to your net pay. Here are examples of withholdings and deductions.
- RRSP Contributions
- Social Security and Medicare taxes
- Federal Income Tax withholdings
- Canadian Pension Plan (CPP) contributions
- Union Dues
- Vision insurance Premiums
- Health Insurance Premiums
- Dental Insurance Premiums
- Employment Insurance (EI) premiums
- Provincial, city and or local tax withholdings
What is Net and Gross for Businesses?
Business also deal with terms like gross and net income. There are some distinct payment structures available to businesses, which can alter what gross and net income can mean when looking at the specifics. This is based on how businesses make money.
Businesses typically sells goods or provide a service. Gross income is typically known as gross profit and represents the total revenue of a business minus the cost of good/services it sells.
The gross amount is the total income generated after creating and selling it’s goods/services, representing the pool of money available for any other expenses.
Net income (or net profit) is the actual amount of money left over when all expenses are accounted for. There are going to be operational costs, administrative costs, charitable efforts, and other miscellaneous expenses.
The net income of a business is the real profit they make at the end of the year after all deductibles. Even for business, gross income vs net income ends up being the same core logic.
Gross Earning in Your Personal Income Taxes?
You will see requests for “Gross Income” when filing your income taxes. The CRA and your provincial government will each request specific amounts that should match what your employer provides.
For the federal government, your gross income will be located in box 14 on your T4 slip. Each province has an equivalent form providing this data.
It’s worth nothing that non-taxable income should not be included in your gross income. Non-taxable income may include gift/prize money, retirement contributions or freelance work under a certain amount.
Frequently Asked Question:
Is Net Income the Same as AGI?
The term adjusted gross income (AGI) is commonly associated with the IRS and is similar concept to net income. AGI represents your gross income after removing any taxable income from your gross amount.
Net income reflects the total amount of money you receive after deductions from your gross income. When it comes to personal income taxes, your net income is based on your adjusted gross income and not your total gross earnings.
Gross income vs net income can be easily calculated, but you need to pay attention to context. These terms are going to appear everywhere from loan applications to corporate financial reports.
The simple rule of thumb is that gross income is the bigger number and reflects the total amount before expenses. Net income is the smaller number and is the real amount you will use when planning your budget.
If you find yourself unsure of which number you need on a form, double check the instructions. It’s better to ask someone for help than use your gross earnings when you meant net income.