Q:

What is the difference between gross and net income?

A:

The difference between gross and net income is that gross income is the total amount of income made and net income is the total amount of income made after taxes and other expenses have been subtracted. The total gross income or gross amount can refer to total profit or total sales.

Salaried employees are taxed on their gross income while businesses and self-employed people are taxed on their net income. This was established in the Income Tax Act of 1961 for the United States. The net income expenses can include selling, general and administrative expenses as well as interest payments.

The term "gross margin" is equal to the gross income as a percentage or revenue whereas the net margin is equal to the net income as a percentage of revenue. Net income is sometimes referred to as "the bottom line" because net income is always listed at the bottom of an income tax statement. In the United Kingdom, net income is also known as "profit attributable to shareholders."

An example of net income and gross income would be a self-employed businessman. Say he makes $50,000 for the year, but he has $20,000 in deductions (expenses) and credits. This means that he has a taxable income of $30,000. Then his income tax of $5,000 will need to be subtracted to arrive at $25,000. So, $25,000 is his net income and $50,000 is his gross income.


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