Gross and Net Incomes: Know the Difference

If you're going to run your own company then you're going to want to make sure you understand the ins and outs of dealing with money and budgeting. This is certainly not something that comes naturally to everyone and while you might have a great idea for a business, one of the most important elements in order to make it sustainable is having enough money at the end of the day, month or year. One of the first steps to being able to create a budget that will work for you is to grasp the concept of the difference between gross and net income. If you understand this then you will not spend a lot of time in the beginning wondering why you are always coming up short at the end of the day.

Gross Income

The gross income of a person or business is going to be the total amount of money that you are taking in. When you're working as a machine operator, for example, in a factory let's say you're making fifteen dollars an hour for forty hours a week. This would mean that your weekly gross income is $600. When you're running a business this might be converted into your gross sales for the week. If you're working on a contract where you're building composite decks for someone at their home then your gross would be the exact amount that you're charging the customer for your work.

Net Income

The net income or net profit refers to the money that you're left with after you apply all of the necessary deductions to the gross income. The best way to see this is by looking at a pay check where taxes have already been deducted. You will see that there is a certain amount of money that has been taken off for income tax and even more to put towards things like social security and your pension. If you're a part of a union then monthly dues for that might be taken off as well. At the bottom of your check you will see what you're going home with after all of these deductions have been subtracted. This is your net income, subject to adjustments at the end of the year when you file your tax return and apply for any benefits that were not counted by your payroll administrator.

If you're running a business then it is important to be using the net income when you're deciding what you can afford for the office or whether you will have enough to provide your employees with extra training, for example. If you're using the gross income or sales figures then you will find that your numbers are not accurate when it comes to adding things up at the end of the month. This could cause some major problems down the road.



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