Gross Income vs. Earned Income: What's the Difference?

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Gross Income vs. Earned Income: An Overview

The distinctions between gross income and earned income are especially important to understand in relation to tax accounting. Report either one incorrectly and you could end up paying more in taxes than you really need to.

Gross income is everything that an individual earns during one year, both as a worker and as an investor. Earned income includes only wages, commissions, bonuses, and business income minus expenses, if the person is self-employed.

Key Takeaways

• Gross income is all income an individual earns during the year both as a worker and as an investor.
• Gross income is derived from income sources beyond those related to employment.
• Earned income only includes wages, commissions, bonuses, and business income minus expenses, if the person is self-employed.
• Gross income and earned income, along with adjusted gross income and modified adjusted gross income, are crucial for tax preparation and filing.

Gross Income

According to the Internal Revenue Service (IRS), gross income is defined as all income an individual receives in the form of money, goods, property, and services that isn't tax exempt.

Gross income includes all the income that constitutes earned income—namely, wages or salary, commissions, and bonuses, as well as business income net of expenses if the person is self-employed.

It also includes income that doesn't come from employment. For instance, it includes income from investments, such as interest and dividends, as well as retirement income represented by retirement account withdrawals.

Additionally, gross income includes Social Security benefits, as well as Social Security disability benefits, unemployment payments, alimony, and child support.

Earned Income

Earned income does not include the same range of income that is accounted for by gross income.

According to the IRS, earned income includes salaries, wages, professional fees, tips, and other amounts received as pay for work performed.

Earned income may also include the fair market value of certain fringe benefits that are deemed taxable through an employer under the direction of the IRS guidelines, long-term disability benefits received prior to minimum retirement age, and strike benefits from involvement in union activities.

Your gross annual income is used to determine what deductions, exemptions, and credits are available to you to determine your total taxable income and then your total tax obligations for the year.

Key Differences

Make sure that you understand the aforementioned differences between gross income and earned income before you prepare and file a tax return.

Gross income is considered total income for the purpose of tax preparation and filing. It is used to further determine your total tax liability.

Gross income is the starting point for calculating your adjusted gross income (AGI), which is your income after deductions. Your modified adjusted gross income (MAGI) is similar to your AGI but with certain deductions added back to the total.

Each of these figures is used in a different way to determine total taxable income and, ultimately, your total tax obligation based on your net income for the year.

Special Considerations

Per IRS regulations, your total earned income determines whether or not you can take certain financial actions throughout the year.

For instance, you can contribute to an individual retirement account only if you have earned income for the year. Moreover, that contribution may not exceed your total earned income for that year.

Where Is Gross Income Listed?

Generally speaking, nowhere until you calculate it by totaling all revenue that you receive during the tax year from all income sources.

When Is Income Not Earned Income?

When it isn't derived from your employment. So, for example, pension benefits, welfare benefits, annuity income, and Social Security benefits are income, but not earned income.

Where Do I Find Adjusted Gross Income on My Tax Return?

For tax year 2023, the place where your AGI should be inserted on your tax return is line 11 of Form 1040.

The Bottom Line

Gross income, earned income, adjusted gross income, and modified adjusted gross income provide the foundation for tax preparation and filing.

The difference between gross income and earned income is an important distinction for your tax accounting. So be sure you understand it when working on your return.

1. Internal Revenue Service. "ITG FAQ #2 Answer-What Income Is Considered Earned Income?"
2. Internal Revenue Service. "Publication 501, Dependents, Standard Deduction, and Filing Information."
3. Internal Revenue Service. "Definition of Adjusted Gross Income."
4. Internal Revenue Service. "Publication 525, Taxable and Nontaxable Income."
5. Internal Revenue Service. "Modified Adjusted Gross Income."
6. Internal Revenue Service. "Publication 590-A, Contributions to Individual Retirement Arrangements."
7. Internal Revenue Service. "Form 1040."

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A flow-through entity is a legal business entity that passes income to the owners and/or investors of the business. It's sometimes referred to as a disregarded entity.

A qualified higher education expense is a tax credit for the parents of students attending a college or other post-secondary institution.

A filing extension is an exemption made for taxpayers who are unable to file their federal tax return by the regular due date.

A widow(er)'s exemption is one of several forms of state or federal tax relief available to a surviving spouse in the period following their spouse's death.

Pretax earnings is a company's income after all operating expenses have been deducted from total sales, but before income taxes have been subtracted.

Earned income includes wages, salaries, bonuses, commissions, tips, and net earnings from self-employment. On your taxes, it is treated differently than unearned income.

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