Your gross monthly income is the amount of money you make before any taxes or deductions are taken out. It’s the starting point when filing income taxes, and it’s also used for other financial transactions such as getting a loan or applying for public assistance.
Let’s take a closer look at how to calculate your gross monthly income and how it plays into other aspects of your financial life.
What is gross monthly income?
Every month, you make a certain amount of money. This could be determined by a salary, commissions, tips, or an hourly wage. Your gross monthly income is the total amount you earn in a month. For example, if your salary is $4,000 per month, your gross monthly income is $4,000 per month.
Keep in mind that your gross monthly income is not the amount deposited into the bank. Your net income is the amount you’re paid after taxes and other deductions are taken out of your pay, and that’s the amount that goes into the bank.
How do you calculate gross monthly income?
People have different ways of getting paid. Some get an annual salary while others are paid hourly or are self-employed. How you calculate your gross monthly income varies depending on how you’re paid.
Calculating the gross monthly income from an annual salary, or annual gross income, is a straightforward process. The formula is:
Annual salary / 12 = Gross monthly income
Divide your annual base salary by the 12 months of the year to get the gross monthly salary. For example, assume your annual salary is $60,000. Take the $60,000 and divide that by 12. This equals $5,000. Your gross monthly income is $5,000.
You can typically find your salary on your pay stub or on the offer letter you received when applying for your job.
Calculating the gross monthly income if you’re an hourly employee involves a couple of extra steps. You’ll want to calculate your weekly income first and then find the total for the year. Then, you’ll use the annual salary formula.
The formula for calculating gross monthly income from an hourly rate is:
[(Hourly pay x Hours per week) X 52 weeks] / 12 = Gross monthly income
For example, assume you get paid $18 per hour for 40 hours per week. This yields $720 per week. Multiply that by 52 weeks in the year to get $37,440 annually. If you divide that by 12, you get a gross monthly income of $3,120.
If you receive overtime pay, add up the amount of overtime you’ve earned over the year and divide it by 12. Add that to the gross monthly income based on your hourly rate.
Someone who is self-employed may have a little more math to do to calculate their gross monthly income. They likely have a fluctuating monthly income. In this case, you would calculate your gross monthly income based on the average of your monthly income. Let’s say you had the following monthly income:
- January: $3,000
- February: $2,500
- March: $3,500
- April: $3,250
- May: $4,000
- June: $3,700
- July: $3,500
- August: $2,900
- September: $3,250
- October: $3,600
- November: $3,500
- December: $2,800
To calculate the gross monthly income, add every month's figures together and divide it by 12. Using the example above, the total of all monthly income is $39,500. When that’s divided by 12, you get $3,291.67, your average gross monthly income.
Multiple types of income
If you have multiple types of income (like an hourly wage for a full-time job and a side hustle or second job), use the formula for each type of income, then add the results together. For example, if you earn a salary of $40,000 for your full-time job, your monthly gross income would be $3,333.33.
If you also drive with Uber Eats on occasional weekends as a second job, you would add up everything you’ve earned with Uber over the past year, then divide it by 12. Let’s say that gives you an average monthly gross income of $200. You would then add that to the monthly gross income from your full-time job to find your total gross monthly income. In this example, that would be $3,333.33 + $200 = $3,533.33.
What is adjusted gross income?
Adjusted gross income (AGI) is a line item found on your annual income tax return. The AGI is based on your gross annual income with certain deductions taken out that directly reduce your taxable income.
Some of the common adjustments made to your AGI include:
- Half of your self-employment taxes
- Contributions to pre-tax retirement accounts such as IRAs
Your AGI is used in many ways. For example, on your tax return, you will use your AGI to determine certain itemized deductions, such as the cost of medical care. Your medical care costs must exceed 7.5% of your AGI to be deductible.
Why is knowing your gross income important?
Your gross income is the basis for a lot of calculations. It’s used for filing taxes as well as other major financial transactions such as buying a home.
Here are some common ways that your gross income is used:
- Taxes: Many states and cities use the AGI on your federal tax form to determine how much you owe in taxes.
- Applying for student financial aid: The Free Application for Federal Student Aid (FAFSA) uses your or your parents’ AGI to determine your eligibility for federal aid.
- Applying for government benefits and public assistance like SNAP: When you apply for public assistance, you will likely be asked for your gross monthly household income.
- Getting tax credits if you buy health insurance on the exchange: Healthcare.gov uses a modified adjusted gross income (MAGI) to determine how much you can get in credits and save on health insurance costs for your family. Credits help make health insurance more affordable for individuals and families.
- Applying for a credit card: Creditworthiness is directly related to your gross monthly income. Credit card applications use your gross monthly income to determine your credit limit based on your ability to repay the debt.
- Child support: How much a parent must pay in child support is directly affected by the parent’s adjusted gross income. Most states use a calculation based on net income derived from the AGI.
- Cost of Medicare Part B: Premiums for Medicare Part B are based on your MAGI, which can change your annual cost of health care. Those with a higher income will pay more for Medicare Part B benefits.
- Getting a mortgage: Mortgage lenders use the gross monthly income to help determine how much money borrowers have available every month to pay a mortgage payment. They use the gross monthly income in a debt-to-income ratio that says how much monthly debt you can have in relation to your monthly income.
- Retirement savings account: If you have a 401(k) or 403(b) through your employer, your contributions may be based on your gross income.
What is the difference between gross and net income?
The difference between gross monthly income and net monthly income is that gross monthly income is the amount earned prior to any tax deductions, and net monthly income takes out tax withholdings and other deductions. In other words, your net pay is the amount deposited in the bank by your employer.
What does net monthly income mean?
Your net monthly income is your take-home pay. It has income tax withholding taken out along with Social Security and Medicare costs. It may also have retirement savings and health care costs taken out. When everything is itemized out of your gross pay, you are left with your net monthly income.
What is the average gross monthly income in the United States?
According to the Federal Reserve Bank of St. Louis, the average annual income in the U.S. in 2020 was $53,996, so the average gross monthly income was $4,499.67.
How do I calculate my gross monthly income from my W2?
You can calculate your gross monthly income from your W2 by taking the Wages, Tips, and Other Compensation figure in Box 1 on your W2 and dividing that number by 12. This becomes your estimated monthly gross income.
How do I find my adjusted gross income on my tax return?
On IRS Form 1040 for 2021, adjusted gross income is on line 11. AGI adds all income sources, including IRA distributions, interest, and Social Security benefits. It then subtracts any adjustments noted on Line 26 of Schedule 1, including contributions to qualified plans and student loan interest deductions.
Knowing your gross monthly income is part of learning how to manage your money. Your gross and adjusted gross income affect many aspects of your financial life.
If you’re curious about how your gross income impacts your taxes, the best tax software can help you sort it out (and the sooner you start working on your taxes, the more time you have to plan if you owe money).