Gross income is the larger 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. Still, it is the actual amount you receive after the accounting department has done its calculations.
Personal Income: Gross Vs Net on Your Paycheck
When you take the time to read your pay stub, 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 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. An excellent way to remember is that “G” comes before “N” in the alphabet.
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 the information your employer provides to you and the governments.
For the federal government, your gross income will be in box 14 on your T4 slip. Each province has an equivalent form providing this data. All this information can be seen in your CRA account, except for Québec, which has its own forms. Revenue Québec’s My Account for Citizens has this information.
It’s worth noting 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.
In Summary
Gross and net income can be easily calculated, but you must consider context. These terms will appear everywhere, from Personal 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 actual amount you will use when planning your budget.
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