What is difference between net and gross income?

The primary difference between net income and gross income lies in the deductions applied to each:

• Gross Income: This is the total amount of money you earn before any deductions are made. It includes all forms of income such as salary, bonuses, overtime pay, freelance work, and investments. Gross income is used for long-term financial planning and is often the figure used to determine tax brackets and loan eligibility12.

• Net Income: This is the amount of money you take home after all deductions have been subtracted from your gross income. These deductions typically include federal and state taxes, Social Security, Medicare, health insurance premiums, and retirement contributions. Net income reflects the actual amount available for spending, saving, and investing13.

In a business context, gross income refers to the revenue after subtracting the cost of goods sold, while net income is the profit after all expenses have been deducted45.

Here's a simple example to illustrate the difference:

• Gross Income: If you earn $4,000 per month from your job, this is your gross income.
• Net Income: After deductions like taxes and insurance, your net income might be $3,000 per month.

Thus, gross income is your total earnings before deductions, and net income is what you have left after all deductions are applied.