Total earnings: understanding gross income

As an employer or an employee, it is essential that you understand the difference between gross income and net income. Continue reading this Legal Kitz blog to learn more about gross income.

What is gross income?

Gross income refers to the total income earned by an individual or business before any deductions or taxes are applied. Sources of gross income includes salaries, wages, bonuses, tips, rental income, investment income among others. Essentially, gross income stems from sources of revenue. Gross income is the starting point for taxable income calculations and often, it is used as a benchmark for determining eligibility for loans, credit cards and financial services alike.

How does gross income differ from net income?

Gross income and net income are two different measures of income. The main difference is that the gross income is the earnings before any deductions and, in contrast, net income is the earnings after the deductions have been taken out. Deductions may include taxes, retirement contributions, insurances and any other expenses. Essentially, gross income is the amount made and net income is the amount the individual or business profits off and is able to take home.

Important factors to consider when calculating gross income:

  1. Exclusions and exemptions: Some types of income may be excluded or exempt from taxation including certain gifts, inheritances or insurance payouts. Exclusions and exemptions may impact the gross income and ultimately, their tax liability.
  2. Pre-Tax deductions: Some employers will offer pre-tax deductions, including contributions to retirement plans or health savings accounts, which reduce an individuals gross income and may result in lower tax liability.
  3. Imputed income: Imputed income refers to income that is not received in the form of cash or direct payment, but is still considered taxable income. For example, if an employee receives a company car for personal use, the value of that benefit is considered imputed income and is included in their gross income.
  4. State and local taxes: Individuals may be subject to state and local income taxes, along with federal income tax, which will impact the gross income and overall tax liability.

Consulting with a tax professional or the relevant tax authorities for guidance is a great way to calculate and report gross income in specific situations.

Gross income and tax

Gross income and tax are closely related as taxes are calculated on the gross income for the individual or the company. Usually, taxes are calculated as a percentage of the gross income and the exact percentage is dependent on the level of income and other factors, such as filing status and deductions. For higher income earners, who generate greater gross income, the tax bracket is increased.

In Australia, there are 4 tax brackets:

  1. Individuals who earn up to $18,000 gross income do not pay any income tax.
  2. Individuals earning between $18,201 to $45,000 gross income is taxed at 19 cents per $1 over the $18,200.
  3. Individuals earning $45,001 to $120,000 gross income have a $5,092 tax deduction and 32.5 cents for each $1 over $45,000.
  4. Individuals earning between $120,001 to $180,000 gross income are deducted $29,467 plus 37 cents for each $1 over $120,000.
  5. Individuals earning $180,000 and over are deducted $51,667 plus 46 cents for each $1 over $180,000.

It is important to note that tax is adjusted each year to account for inflation or other economic pressures and individuals may change brackets in the new year.

For information regarding tax on gross income, visit the Australian Taxation Office (ATO)

Gross income and tax legislation

In Australia, gross income is determined by the Income Tax Assessment Act 1997 (ITAA 1997). The act outlines the rules for calculating taxable income, which is based off their gross earnings. Moreover, the ITAA 1997 outlines the rules for determining deductions.

Additionally, there are other legislative pieces that may impact an individual’s gross income, depending on the specific situation. For example, if an individual receives income from any investment property’s, they may be subject to the Income Tax Assessment Act 1936 (ITAA 1936). Similarly, business operators may be subject to the rules set out in the ITAA 1997 as well as the Taxation Administration Act 1953 (ITAA 1953).

Legal advice

Individuals and businesses can benefit from seeking legal advice to ensure they are compliant with tax laws, maximise deductions and credits, avoid penalties and fines and plan for the future. If you need further assistance or advice regarding gross income or tax we here at Legal Kitz would love to help you. We offer free resources and the option to request a free 30-minute consultation for all of your employment queries. Additionally, our sister company Business Kitz offers a subscription-based plan with over 150+ legally compliant documents.