Gross Income and Earned Income:
The distinctions between gross income and earned income are particularly important to understand when it comes to tax accounting. Report either incorrectly and you could end up paying more tax than you need.
Gross income is everything an individual earns for a year, both as a worker and as an investor. Earned income includes only salaries, commissions, bonuses, and business income, fewer expenses, if the person is self-employed.
Key points to remember
- Gross income is everything an individual earns during the year both as a worker and as an investor.
- Earned income includes only salaries, commissions, bonuses, and business income, fewer expenses, if the person is self-employed.
- Gross income and earned income, as well as adjusted gross income and adjusted gross income, are essential for preparing and filing tax returns.
Gross revenue
According to the Internal Revenue Service (IRS), gross income is defined as all income an individual receives in the form of money, goods, goods, and services that are not exempt from tax. Gross income includes all of the same measures that make up earned income, namely wages or salaries, commissions, and bonuses, as well as business income net of expenses if the person is self-employed.
Gross income also includes investment income in the form of interest and dividends, as well as retirement income from withdrawals from retirement accounts. In addition, gross income includes SocialSecurity benefits, as well as Social Security disability benefits, unemployment benefits, alimony, and child support.2
earned income
According to the IRS, earned income includes wages, salaries, professional fees, and other amounts received as compensation for work performed.
Earned income may also include the fair market value of certain employee benefits that are deemed taxable through an employer under IRS guidelines, long-term disability benefits received before the minimum retirement age pension, and strike pay resulting from participation in union activities.
Earned income does not include the same range of income that is counted as part of gross income.
Key differences
Make sure you understand the differences between gross income and earned income before preparing and filing a tax return. Other tax terms commonly used by individuals should include Adjusted Gross Income (AGI) and Modified Adjusted Gross Income (MAGI).2 Each of these is used in a different way to determine total taxable income and ultimately account, for your total tax liability based on your net income for the year.
Gross income is considered total income to prepare and file tax returns. It is used to further determine your total tax liability. This figure is also the starting point for calculating your AGI, which is your income after deductions. Your MAGI, on the other hand, is similar to your AGI but with some deductions added to the total.5
Special Considerations
The IRS uses your total earned income to determine if certain financial actions can be taken throughout the year. For example, you can only contribute to an Individual Retirement Account if you have earned income for the year, and that contribution cannot exceed your total earned income for that year.
Your gross annual income is used to determine the deductions, exemptions, and credits available to you to determine your total taxable income and then your total tax liability for the year.
Earned Income, Gross Income, Adjusted Gross Income, and Modified Adjusted Gross Income form the basis for preparing and filing tax returns. The difference between earned income and the gross income is important in your tax accounting.
