The United States financial system works on the principal of income and expenses. Income is money you receive, while an expense refers to money that you pay out. Most income is subject to taxation, while some income may be exempt. Gross income refers to all income from all sources. Gross income is an important factor in determining your income tax obligation, but lenders may also use gross income to determine whether you qualify for a loan.
Gross Pay for Income Taxes
The Internal Revenue Services uses gross income to determine whether a taxpayer is required to file a federal income tax return. The IRS considers any income received by the taxpayer that is not exempt by law from taxes to be gross income. Income is often in the form of money, but it may also be in the form of services performed, goods or property. A taxpayer must add up all taxable income for the year from all sources, both earned and unearned, before any taxes or other withholdings are removed, to determine her gross income. She would divide her annual gross income by twelve to determine her monthly gross income.
People who are employed typically work for a fixed salary, an hourly wage, a commission, tips, bonuses or a combination of these. The total amount the worker earns is her gross income, but she usually doesn't receive this amount in her regular paycheck. Most employers are required by law to withhold certain amounts for income taxes, Social Security taxes and Medicare taxes. Employers may withhold amounts for employee contributions to health insurance, retirement plans or other purposes. The amount of spendable money the employee receives in her monthly paycheck is referred to as her net monthly income. The total amount paid by her employer is referred to as her gross monthly income.
Self-employed individuals typically do not draw a paycheck. Their gross income is dependent upon the type of business they are involved in. The gross monthly income of a self-employed individual in a service industry is her total receipts for the month. The gross monthly income for a self-employed individual in a goods industry, that is one that manufactures, markets or produces goods for sale, is the total sales for the month less the total cost of goods for the month.
Unearned income is income that the recipient did not work for. Unearned income is usually the result of a return on investment, such as stock dividends or interest on a certificate of deposit. Some unearned income, such as the interest on municipal bonds or qualified withdrawals from a Roth IRA, are not subject to federal income taxes, so the IRS doesn't include them when figuring a taxpayer's gross income. Most unearned income is taxable, and must be included. Some lenders, such as mortgage companies, may include non-taxable unearned income in a borrower's gross income when determining whether they make enough money to qualify for a loan.