Mastering Your Finances: A Step-by-Step Guide to Calculating Gross Income

In the realm of employee compensation, understanding gross income is paramount. It’s the foundation upon which net income, adjusted gross income, and other income types are built. Simply put, gross income represents what employees earn before taxes and deductions.

However, calculating gross compensation income can be complex and prone to costly errors, which can have significant financial implications. To guide you through this process with precision, we’ve crafted a comprehensive step-by-step guide. Let’s embark on this journey together.

How to Calculate Gross Income: The Basics

Gross income is calculated by adding all income sources before taxes and deductions, like your salary, bonuses or commissions remitted by your employer, and income earned from other jobs.

You can use the formula below to compute your gross income:

Gross income = Σ income earned

Calculating Monthly Gross Income

If you’re wondering how to compute gross income, whether you’re paid a monthly salary or an hourly wage, specific formulas are applied. Let’s explore each formula in detail:

  1. For salaried employees: Gross monthly income = Annual gross income ÷ 12
  2. For employees paid hourly: Gross monthly income = (Hourly pay x hours worked per week x 52) ÷ 12

To compute your gross compensation income, first identify where you earn your monthly income and list these sources. You may check your payslip or ask your manager or HR officer for information about your salary.

Next, indicate how much you earn from each income source and turn your hourly pay into an annual figure. Divide each annual value by 12 to get your gross monthly income.

Finally, add all monthly income sources to compute your total gross income.

Computing Your Annual Gross Income

One of the formulas given above uses a value called the annual gross income (AGI), which describes an employee’s total earnings made within one year before deductions.

AGI represents how much money you receive from different sources. In the Philippines, it may include your monthly salary, commissions from services you offer, and other payments, such as gains from property dealings and prizes. However, the following aren’t included in this value:

  • Payments for life insurance plans or amounts received as return of premium
  • Gifts, bequests (properties given from one’s will), and devises (a gift of property made in will)
  • Compensation you get when injured or sick
  • Income exempt under treaty
  • Retirement benefits, pensions, gratuities, or similar payments
  • Miscellaneous items, including government benefits, 13th-month pay, and other benefits below ₱90,000

Why Compute Annual Gross Income?

Understanding your annual gross income (AGI) serves several important purposes. Firstly, it assists your employer in accurately preparing tax returns. By accounting for deductions and exemptions applicable to your monthly income, AGI is derived, which subsequently determines your taxable income.

Furthermore, when applying for a loan, lenders typically consider your gross income to establish the maximum borrowing amount you qualify for. This determination is often based on the debt-to-income ratio (DTI), calculated using a specific formula:

Monthly debt payments ÷ Monthly gross income = Debt-to-income ratio

How to Calculate Your Annual Gross Income

Here’s how to calculate your AGI and use it to compute your monthly gross income.

  1. Compute your annual gross salary. Multiply your monthly gross pay by 12, like this: ₱30,000 x 12 = ₱360,000
  2. Add other payments you’ve received throughout the year with their sources. Your calculation should look like this: ₱360,000 (annual gross salary) + ₱10,000 (interest) + ₱5,000 (dividends) + ₱30,000 (prizes or winnings) = ₱405,000
  3. Use your monthly gross pay to calculate your monthly gross income.
    1. If you’ve computed the monthly gross pay value without other amounts, the formula should be ₱360,000 ÷ 12 = ₱30,000.
    2. If you use the monthly gross pay value with other amounts included, your computation should be ₱405,000 ÷ 12 = ₱33,750.

The Difference Between Gross Income & Net Income

Gross income signifies your earnings before deductions and taxes, encompassing all payments received over a specific period, typically a year.

This includes earnings from various sources such as rent, wages, dividends, and interests. For instance, a Filipino employee’s annual gross income may include their regular pay, commissions, property investments, and annuities.

Conversely, net income reflects your earnings after deductions and taxes, representing the amount deposited into your bank account per pay period or the value of your paycheck. In the Philippines, monthly gross income transforms into net income or “take-home pay” once mandatory employee contributions and taxes are subtracted.

To determine your net income, calculate the total deductions from your monthly gross income using the following formula:

Net pay = Gross pay – deductions

Precision in Payroll

Gross income helps your employer compute your monthly pay. By knowing how much of that amount you receive, you can manage your finances properly.

However, gross income computations can be tricky. A digital payroll system makes the process easier for fewer errors and timelier, more accurate payments.

If your HR department needs a digital payroll solution, Sprout Solutions can be its partner. Book a consultation today for more details about our payroll system.

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