Whether you are a business owner or employed by someone else, income is something that everyone is concerned about. Income is what keeps the world moving around. However, it is important to remember that not all income is the same. There are two forms of income, gross income and net income. It is important for everyone to know and understand the difference between the two. Propel Your Accounting is here to talk about both gross income and net income as well as when the difference between the two is going to be important.
Understanding Gross Income
When someone refers to your gross income, you want to know exactly what they are talking about. Your gross income is referring to your earnings before any deductions are taken away. Some things that will surely be included in your gross income are earnings, bonuses, interest, dividends and any other source of income you have. When speaking of businesses, gross income refers to your total revenue minus the cost of goods sold.
Understanding Net Income
The net income that you hear referred to often is the amount of money that you are bringing home. After all the deductions are taken out of your check, you are left with your net income. The deductions that are usually taken out of your taxes include social security contributions, taxes, health insurance premiums, and retirement contributions. Speaking of businesses, net income is the money left over after all operating expenses, taxes, interest and other costs are taken out.
Importance of Understanding the Difference Between Gross & Net Income
It is important for people to understand the difference between gross and net income for a number of different reasons.
– Tax Prep: When you get ready to prepare your taxes, you are going to need to know both your gross and your net income. Your gross income is what the IRS is going to use to place you in the right tax bracket. There are also various deductions and credits that are determined by your net income though.
– Financial Planning: All financial planning involves creating a budget of some kind. You need to know what your numbers are when making plans for what you have available to spend.
– Business Insights: As a business owner, knowing the difference between gross and net income can give you valuable insights into how profitable your business is. It can also help you have a clear picture of how efficient you are running your business. This is one of the most important pieces of information you can have about your business.
Bookkeeping, Accounting, Business Consulting & HR / Admin Services in the United States of America
As we approach tax season, it is vital for business owners as well as individuals to have a clear understanding of the differences between gross and net income. If you aren’t sure how to prepare your taxes, you can turn to Propel Your Accounting to help you take advantage of all the deductions and credits that are available to you. Call us today!
