What is the difference between gross income and net income?

The distinction between gross income and net income primarily lies in the deductions made from gross income. Gross income represents the total income earned by an individual or entity before any deductions are applied. This includes wages, salaries, bonuses, rental income, and any other income sources. On the other hand, net income is the amount that remains after all expenses, taxes, and other deductions have been subtracted from the gross income.

Understanding this difference is crucial for individuals and businesses as it impacts financial planning, budgeting, and tax obligations. For individuals, knowing the net income is essential for assessing what funds are actually available for spending and saving after mandatory deductions. In summary, gross income is the starting point, while net income reflects the actual income that can be utilized for personal or business expenditures.