Gross vs Net Income.
Many people face utter confusion when asked to state the difference between gross and net income. To be fully in control of your finances you need to understand the tangible differences between the two. Both personal and business finances can be greatly affected if you lack this relevant knowledge.
As an employee, your wages are determined by numerous factors. Your pay slip will contain a set of two figures. The first number is classed as your ‘gross income’. It is the amount your employer has agreed to pay you for either a week or months worth of work before the government charges you any taxes. This calculation becomes a slightly more complex if you run a business or large corporation. In order to calculate your gross income from the business, you first need to take away the cost of the goods. An easy calculation is as follows; Cost per unit of sales ‘“ total cost of goods sold = Gross profit. If your calculation generates a negative figure, it is unfortunate, but your company has made no money during the financial year.
Now comes the tricky bit because we live in a democratic society we are expected to pay a certain level of tax to the state. The government looks at the amount we earn. The level of your gross income determines what level of tax you have to pay. The more you earn, the more you have to pay. Different countries have different levels of deductions and the government has the right to deduct your gross income accordingly. You can often find yourself with an extremely depleted final figure after all the taxations are deducted.
Business Net Income is even more confusing for the business owner. Net income is calculated by subtracting not only the cost of goods, but also any operating expenses that have occurred while running your business. The list that you can claim for is endless. Of course the benefits of this are that the more you deduct, the lower your income becomes and the less the government can tax you for.
Summary
- For an individual, gross income is the salary that your employer pays you before deductions.
- For a company, gross income is established by the following calculation: Cost per unit of sales ‘“ total cost of goods = Gross Profit.
- Both individual employees and businesses pay tax in relation to their gross salary or profit.
- Many different taxes are deducted from your earnings
- Once the tax has been deducted from your gross earnings, you are left with what is known as your net income.