How to calculate gross monthly income for taxes and more

Understanding your income is a vital aspect of financial management, and gross monthly income is a key component to consider. Gross monthly income includes all the money you earn before deductions or taxes are taken out. It encompasses the money you receive from your job (including wages, salaries and bonuses) and any additional sources of income.

Gross monthly income provides a clear picture of your earnings and can help you make informed decisions about budgeting, saving and investing. In this article, you’ll learn how to calculate gross monthly income based on your annual or hourly pay, when you’ll need it and how it applies to your taxes.

• What is gross monthly income?
• Gross monthly income formula  
• Why is gross income important for federal taxes?
• What to exclude from gross income for federal tax purposes
• What’s next: Taxes and beyond

What is gross monthly income?

Gross monthly income is the total amount of income you earn in a single month before any taxes or deductions are withheld. This information is usually specified in your job offer letter and itemized on your paycheck.

Regular overtime, bonuses or commissions are considered part of a worker’s gross income. You should know your monthly gross income if you’re applying for a loan, as approval may rely on how much it is. Keep in mind: Gross income includes both earned and unearned income.

What’s the difference between earned and unearned income?

Generally, earned income includes money you make — either as an employee or through working for yourself. In other words, it includes all types of income you actively earned, including passive income.

For example, if you receive a paycheck from an employer, you can typically look on the pay stub for a line item that says something like, “total gross pay.” This number gets calculated before taxes and other withholdings get taken out. If you have multiple employers and receive multiple paychecks, you’ll need to add the income from all of your W-2s to get the total for your tax return.

If you receive tips for your job, don’t forget to include these as well.

On the other hand, unearned income is income that you didn’t work for, including interest from savings, dividends on investments, lottery winnings, life insurance proceeds and more.

What is gross monthly household income?

Your gross monthly household income is the total monthly income of all household members. It can include:

• Business income
• Income from a second job
• Regular overtime, bonuses or commissions
• Investments
• Child support payments
• Public assistance
• Social Security payments

For example, if Sarah makes $3,000 a month at her full-time job and $1,500 a month with her side business while her husband, John, makes $4,200 a month, their gross monthly household income would equal $8,700.

When deciding whether you qualify and how much you can borrow, lenders and credit card companies look at your gross monthly household income vs. expenses on applications. Being aware of this number is helpful if you’re going through these processes.

Mortgage lenders usually require your housing expenses to be less than or equal to 25% to 28% of your monthly gross income, according to the Federal Deposit Insurance Corp.  

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Gross monthly income formula

With an annual salary, you can easily find your gross monthly income by dividing your yearly earnings (salary) by 12.

For example, if Irene earns $65,000 annually, she would divide her yearly salary by 12, resulting in a gross monthly income of $5,417.

Calculate your annual salary first to determine your gross monthly income if you earn an hourly wage. Multiply the number of hours you work per week by your hourly pay, then multiply that by 52. Lastly, divide that number by 12 for your gross monthly income.

Let’s take Matt, for instance. If Matt’s hourly wage is $24 and he works 40 hours per week, his gross weekly income would be $960. By multiplying his weekly income by 52, his annual gross income totals $49,920. Lastly, by dividing his annual income by 12, Matt’s gross monthly income would be $4,160.

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Why is gross income important for federal taxes?

First of all, your gross income is important because it helps determine whether you must file or not.

For tax year 2023, you must file a federal tax return if your gross income is at or above the minimum listed below for your filing status and age at the end of the tax year.

Gross income is also the starting point for figuring out adjusted gross income. Your Adjusted Gross Income (AGI) is the result of subtracting the IRS-approved adjustments from your gross income. Once you determine your AGI, you can calculate your taxable income by subtracting applicable deductions.

When completing IRS Form 1040, you’ll disclose your gross income and then apply adjustments and deductions to calculate your taxable income. This taxable income value will then determine your income tax bracket.

What to exclude from gross income for federal tax purposes

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There’s an important distinction between gross income for tax purposes and gross income as it applies to other financial matters.

For example, a mortgage lender who is considering whether to give you a mortgage likely wants to know about your gross monthly income before taxes.

Comparing your gross income vs. net income (your take-home pay after payroll taxes and other deductions) can help the lender understand your financial picture. For the sake of federal taxes, you can exclude certain types of income from your gross income because the IRS doesn’t consider them taxable.

Here are some examples of income items that get excluded from gross income:

• Qualified scholarships
• Life insurance death benefits
• Inheritances and gifts
• Interest from state or municipal bonds
• Compensation for injuries or sickness
• Amounts your employer contributes to a qualified pension plan on your behalf
• Military pay for serving in a combat zone
• The amount your employer pays for your accident or health insurance
• Payments foster parents receive from a government entity to provide foster care

So if you get injured at work and approved for three months of workers’ compensation payments, you likely won’t have to include that money in your gross income. The same is true if you inherit money or real estate from a deceased relative. If you receive life insurance payouts in addition to your inheritance, you likely won’t have to consider this money as part of your gross income either.

Gross income may seem like a pretty straightforward concept — it’s all the income you earn. But when it comes to taxes, not all types of income are treated the same.

Gross income can get you closer to calculating your federal tax obligation. But you may have some types of income that aren’t taxable and don’t need to get included in your gross income.

To learn more about the types of income that are and aren’t taxed, you can check out IRS Publication 525.

What’s next: Taxes and beyond

Knowing your gross income is essential when filing state income taxes, but you’ll also need it when applying for a mortgage or similar loans. When assessing credit applications, lenders consider your credit score, credit report and debt-to-income ratio.

Monitor your credit score and receive personalized recommendations when you download the Credit Karma app.

Sourcing

• Gross monthly income.  How Much House Can I Afford? (February 2023)
• Gross income on a pay stub. How to read a pay stub (June 2022)
• Gross monthly income should exceed housing expenses. How Much House Can I Afford? (September 2019)
• Gross monthly income includes unearned income. Filing Requirements Threshold (May 2021)
• Tax year 2022 filing thresholds. Who needs to file a tax return (January 2023)
• Adjusted gross income. Definition of Adjusted Gross Income (March 2023)
• Calculating taxable income on Form 1040. 2022 Instruction 1040 (January 2023)
• Gross income exclusions. 26 U.S. Code Part III (February 2021)