Gross vs. Net Income: How Are They Different?

Do you know the difference between “gross income” and “net income”? For starters, while they both have a similar baseline,  gross income refers to the “big” amount of money on your income statements while net income is the “small” one. 

Thinking about it this way makes it easy to understand, but if you’re serious about managing your money, there’s more to learn. In today’s article, we’ll be taking a deep dive into gross income and net income. Also, we’ll discuss the relationship between income and budget and how you can manage your expenses more effectively!

Understanding gross income

Gross income is the total amount of money you earn before any deductions or taxes are taken out. Gross income can be comprised of active income, passive income, or both. Active income is the money you receive in exchange for your work. This type of income is commonly earned in the form of wages, salaries, tips, and commissions. Passive income, on the other hand, is obtained with little or no effort and includes rental income, alimony, interest, and dividends. 

If you’re a full-time employee with no additional streams of income such as a side project or job, your gross income will be solely made up of your salary, and any additional tips or commissions. 

Here’s an example:

Tessa is a sales representative for a cosmetics brand, her salary is $40,000 per year, and she also gets a yearly bonus of $3000. As a result, her gross income is a combination of a fixed salary and a bonus, which equals to $43,000.

If you’re a freelancer or independent contractor, your gross income is calculated by combining all the work you have completed for your clients over the course of 12 months. It’s noted that the payments you receive from each project are different due to a project’s sizing and complexity.

And if you’re an hourly worker, your annual gross income would be your hourly rate multiplied by the number of hours you work every year. For example, if your hourly rate is $8, and you have completed 1500 work hours, your gross income would be $12,000. 

Passive income is generated without requiring a person to be physically present to make money. Instead of trading your time and labor for money, by making an initial investment,  you can make a living passively. Rental income, interest, and dividends are passive income sources that can bring in a steady profit.

Understanding net income

Net income is the remaining money after deductions and taxes have been subtracted. That is the money that you put into your pocket on payday. It’s the amount you’d get if you cashed your check, or if you use direct deposit, it’s the amount deposited in your bank account.

Not everyone’s obligation is to pay taxes, but if you’re earning a certain amount, you’ll have to file taxes. However, not all sources of income will be taxed. It’s important to know what is taxable and what is not. 

According to IRS, these income sources are counted as taxable income:

  • Wages, salaries, tips, and other taxable employee pay
  • Union strike benefits
  • Long-term disability benefits received prior to minimum retirement age
  • Net self-employment or freelance earnings under certain circumstances
  • Jury duty fees you earned
  • Security deposits and rental property income
  • Awards, prizes, gambling, lottery and contest winnings
  • Back pay from labor discrimination lawsuits
  • Unemployment benefits
  • Capital gains (there’s an exception for the selling of a property that’s your primary residence)
  • Severance pay from a previous job
  • Alimony from an ex-spouse
  • Interest or dividends from investments
  • Royalties and license payments
  • Canceled debts (but there are key exceptions for those declaring bankruptcy)

Types of income that are not taxed include:

  • Workers’ compensation benefits
  • Child support payments
  • Life insurance proceeds unless the policy was turned over to you for a price
  • Disability benefits (if you contributed to the premiums from your salary)
  • Social Security benefits (depending on your filing status and other income)
  • Capital gains on the sale of your primary home (up to certain thresholds)
  • Money received as a gift or other inherited assets (the exception here is, if you’ve earned money as a result of that gift, you owe taxes on those earnings)
  • Canceled debts intended as a gift to you
  • Scholarships or fellowship grants
  • Foster care payments
  • Federal income tax refund
  • Money rolled over from one retirement account to another via trustee-to-trustee transfer

How does your income affect your budget?

A budget is a spending plan that allocates personal income towards expenses, savings, and debt repayment. This tool allows you to stay in control of your spending and not get into debt. When it comes to budgeting, it’s important to know what number to use: gross income or net income. As net income is the actual amount you have, it should be used as a base to create a budget rather than gross income. 

Once you know how much you take home every month, start tracking how much you’re spending. Start with your fixed costs, such as your rent, and any regular monthly costs that are usually about the same amount, such as utility bills. Next, gather all the bills for variable expenses such as groceries, personal care expenses, entertainment, etc. Be careful with your variable expenses because it fluctuates month to month. Play it safe by making sure there’s always a limit for these expenses. 

It’s important to keep track of your bills in order to ensure you’re staying on budget, but  eventually, these piles of bills can take up a lot of space. It can also be frustrating and time consuming to extract data from each bill to add to your monthly spending report. But don’t worry, we have the perfect solution for you —an expense tracker app!  

Shoeboxed is an expense tracker app that stores all your bills on the cloud and allows you to easily compile them into a report. All you have to do is scan your bills, organize them the way you want, and you’re good to go. Shoeboxed will make your expenses tracking and management a breeze!

The bottom line 

Some people often confuse gross and net income, which can be detrimental when doing taxes and budgeting. Therefore, having a solid grasp of gross and net income is vital to ensure you meet your financial goals. 

Revenue vs. Profit: What’s the Difference?

Are you tired of 9-to-5 jobs? Are you seeking another job with more freedom and opportunities? Are you a man of entrepreneurial spirit? If your answers are yes, chances are you will soon launch your own business. 

You’ve come up with a good business idea, done lots of market research, and even planned out a detailed marketing strategy. Good job, that’s almost everything you need from the outset. The only thing left is to outline how to make money for your business. Have you learned about revenue and profit? Do you know how to calculate them and how they are related to each other?

Unfortunately, if you haven’t considered these matters, it’s not time to hit the road because no business is able to survive without generating revenue and gaining enough profit. According to CBInsights data, running out of cash places at the top reason for startups’ failure. 

That’s why today, we’re here to bring relief to your problem. In this article, we’ll discuss everything you need to know about revenue and profit from what they mean, how to calculate them, and their relationship.

Understanding revenue

What is revenue?

Revenue or gross income is the money generated from your business operating and non-operating activities. The first source, operating income, comes from core business activities such as the sale of goods or the provision of services. On the other hand, non-operating income is derived from a secondary source which is often unpredictable or nonrecurring such as the sale of an asset or a windfall from investments. All in all, revenue is the total income you have before deducting any expenses or taxes.

How to calculate revenue?

The total revenue is made up of operating revenue (total sales revenue) and non-operating revenue. 

Total Revenue = Total Sales Revenue + Non-operating revenue

To calculate total sales revenue, combine all the sales revenue of each item you’re selling.

Total Sales Revenue = (Sales Revenue Item A) + (Sales Revenue Item B) + (Sales Revenue Item C)…

To calculate the sales revenue of each item, multiply its price with the number of sales.  

Sales Revenue (Item A) = Price * Sales Volume

The sales volume is the number of transactions that are recorded in the account book. This, however, depends on the accounting method employed, either cash accounting or accrual accounting. 

The cash accounting method records a transaction only when a payment is received. On the other hand, under the accrual method, transactions are documented when they are incurred rather than awaiting payment. This means a purchase is recorded as a transaction even though the funds are not received. 

The accounting method your business adopts to record sales will determine the total sales revenue. Small businesses use cash accounting while enterprises adopt accrual accounting. Unlike accrual accounting which records revenue before receiving payment for goods, cash accounting recognizes revenue only when a receipt is issued as proof of payment. 

Though small, your business can generate up to hundreds of receipts per month. It’s time-consuming to add every single receipt to the account book, then organize and make reports. If this process can be switched from manual to digital, it’ll save plenty of time. Shoeboxed is the ideal solution for small businesses. Shoexboxed turns receipts into data and makes revenue reports out of them easily. 

Understanding profit

What is profit?

Profit is a business’s total revenue minus total costs, expenses, and taxes. Though “revenue” and “profit” are often used interchangeably, they mean different things. People use these terms interchangeably because they think you’ll definitely have positive profit if your business has positive revenue. However, you can have strong revenue but still post a net loss if total costs exceed revenue. 

How to calculate profit?

Profit can be broken down further into gross profit, operating profit, and net profit. Gross profit is the income you earn after subtracting the cost of goods sold (COGS) from the sales revenue.

Gross profit = Sales Revenue – COGS

For example, Company A has a sales revenue of $50,000, and the COGS is $30,000. As a result, Company A’s gross profit is $20,000. 

The second tier of profitability is operating profit, which is calculated by deducting operating expenses from gross profit. Operating expenses are any expenses your business incurs through normal business operations such as rent, equipment, inventory costs, etc. 

Operating profit = Gross profit – Operating expenses

Assume that Company A has a $20,000 gross profit. If the operating expenses are $5,000 then their operating profit will be $15,000. 

The third level of profitability is net profit. This is the income that remains after adding in your non-operating revenue and subtracting your non-operating costs such as taxes and interest. 

Net profit = Operating profit + Non-operating revenue – Non-operating costs

Company A has an operating profit of $15,000, a non-operating revenue of $10,000, and costs for taxes and interest is $7,000. Their net profit will be $15,000 plus $10,000 and minus $7,000, which equals $18,000.

Revenue and profit: how are they related?

Revenue and profit are both important metrics to track business performance. They should always be put into consideration side by side to ensure positive output for your business. We’ve compiled a list of key information about revenue and profit and put them side by side for comparison.

Basis for comparisonRevenueProfit
MeaningRevenue is the money generated from your business operating and non-operating activities.Profit is the income that remains after subtracting total costs, expenses, and taxes.
TypesOperating revenue

Non-operating revenue
Gross profit

Operating profit

Net profit
PlacementThe top line of the income statementThe bottom line of the income statement
EquationTotal Revenue = Total Sales Revenue + Non-operating revenueGross profit = Sales Revenue – COGS (Cost of good sold)

Operating profit = Gross profit – Operating expenses

Net profit = Operating profit + Non-operating revenue – Non-operating costs
DependenceRevenue exists with or without profit. Without revenue, there will be no profit.
ImportanceRevenue is essential for operating a business.Profit is crucial for business survival and growth.

The bottom line

Operating a business is like going on a journey. Revenue is the supplies that keep your business alive. But profit is the foodstuff you need to survive through the journey. It’s important to have a good grasp of revenue and profit, not only their meaning but also how they are related and calculated. 

8 Simple Practices For Small Businesses To Organize Receipts Efficiently

Keeping a record of your business transactions is considered a top priority for a self-employed or small business owner. Keeping your records properly saves you from being audited by the IRS. Plus, staying organized will save you time during tax season. 

However, we understand that keeping track of all your receipts and records can be tedious and time-consuming. That’s why in this article, we’ve outlined eight best practices to help you organize receipts and records efficiently. 

1. Use a business account and credit card instead of cash

As the IRS will continue to enforce its audit rules, keeping a better set of bookkeeping and receipts for all of your expenses will help you save time and hustle. This simple yet important tip can help you cope with it. Avoid using cash — it’s easy to spend, hard to track, and nearly impossible to match up cash spent with receipts. 

On the other hand, a credit card or debit card will provide you with monthly statements, enabling you to cross-check details with your paper receipts. It’s also a good idea to have a separate business account and credit card, so you don’t mix business expenses with your personal spending. 

2. Save your receipts

Don’t just rely on bank statements, credit card statements, or canceled checks! The IRS won’t accept your bank or credit card statements to justify deductible expenses. You will need an itemized receipt that corresponds with the transaction. 

Hang on those itemized receipts, which are also called “source documents,” for at least six years after your last Notice of Assessment since the IRS will ask to see them in the event of an audit. You can keep a physical or digital version of receipts. 

3. Choose email receipts instead of paper receipts

Nowadays, many merchants offer this service to their customers. You can choose to receive your receipts via emails, label and categorize them in a specific order. Email receipts are convenient and friendly to the environment as they go straight to your inbox and clear your desk and drawers from piles of paper receipts. You can always find them easily, create expense reports, and do so much more. 

4. Review your receipts once a month

Spending some time reviewing, categorizing, and organizing receipts for 30 minutes every month can make a huge difference! It keeps things manageable as the year progresses and helps you keep track of your spending so that you won’t miss out on any tax deductions. 

You can purchase an accordion folder every year to store all business receipts and make sure each folder contains all receipts for the year. These folders are inexpensive and easy to obtain. They allow you to organize receipts by category and year, making it easier than ever to find any receipt even years later. 

5. Make notes on the back of receipts

This is an especially great idea to keep track of dining and entertainment expenses. It’s easy to recall why you bought a printer, but it can be difficult to suddenly remember who you went to dinner with and what the business purpose was in 2015. By starting this simple habit, you will rest assured that you will not miss any dining and entertainment expense deductions for business purposes.

6. Create a spreadsheet for work-from-home expenses

Whether you have always been working from home, or you are working remotely due to the Covid-19 pandemic, there will always be some noticeably deductible business expenses. These expenses include a portion of cleaning materials, utilities, home insurances, office supplies, along with part of your property taxes, mortgage interest, and capital cost allowance.

To claim these expenses, you need to calculate the percentage of your home used for business and apply that percentage to the tax deduction. Create a spreadsheet including your receipts for home office expenses throughout the year. By making it a habit to update the spreadsheet once a month, you’ll save yourself the headache of scrambling to input and tally up all your work-from-home expenses at the end of the tax year.

7. Back up your receipts

Since paper receipts tend to fade with time, keeping a digital copy of each receipt can save you from getting in trouble with the IRS. The simplest practice is to snap a picture of each receipt on your phone, then upload it to a central location later and keep it for at least six years. The IRS allows digitally stored receipts, however, don’t forget to back up stored receipts (on the cloud or a memory device) in case your hard drive crashes and deletes all your important information by accident. 

8. Scan and store your receipts digitally

Storing receipts digitally has been proven to improve business efficiency. It provides several benefits including time and cost-saving, easy to store and access, tax-ready, reduces clutter,  lessens the risk of data loss, increases security, and so much more. 

There are plenty of receipt scanning apps that you can use to scan and store your receipt digitally. Each offers special features for particular purposes, so anyone can choose the most suitable one and benefit from it. 

Shoeboxed is a painless receipt scanning and organizing solution for freelancers and small businesses owners. This versatile app serves many purposes: scan, store and organize receipts, manage business expenses, store business cards and even track mileage for business travelers. 

Shoeboxed’s OCR engine and human data verification features ensure that your receipts are legibly scanned, clearly categorized, and accepted by both the Internal Revenue Service and the Canada Revenue Service in the event of an audit. What’s more, Shoeboxed enables you to create clear and comprehensive expense reports that include images of your receipts. You can then export, share or print all of the information you need for easy tax preparation or reimbursement… within a few clicks. 

Shoeboxed is now available on iOS and Android. Get your free trial before choosing the perfect plan

Conclusion

Organizing your receipts can keep you proactive and productive, which saves you lots of time, stress, and even money in the long run. Going digital helps you organize receipts and keep track of your expenses easier than ever. As everything is digitally stored and accessible through a cloud-based system, you will be able to work with them anytime, from anywhere, with any device, within a few clicks. 

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