What Is Gross Monthly Income? | Definition & Simple Calculator
Whenever you are filling out a loan application, a job offer, or a rental application, one of the amounts you will come across first is gross monthly income. For lenders, landlords, and other financial institutions, income is routinely used to access credit, housing, and other financial facilities. Meaning, is it and how do you calculate it is still a mystery for many.
Introduction: Definition of Gross Monthly Income
The gross monthly income refers to the total amount of money you have earned in a month without deductions. Deductions are taxes, health insurance, Social Security, and other retirement contributions.
It is employed for analyzing the affordability of the mortgage, car loan, and credit card.
It is used to verify if one's income is sufficient in paying the rent.
It can be offered by the employers in job offers to enable easy salary comparison.
This is the amount available before expenses or withholdings are considered.
How to Calculate Gross Monthly Income
Salaried Employees: If you earn a fixed annual salary, simply divide it by 12.
Example: $60,000 ÷ 12 = $5,000 gross monthly income
Hourly Employees: If you’re paid by the hour, multiply your hourly wage by the number of hours you work per week, then multiply by 52 (weeks in a year) and divide by 12.
Example: $20/hour × 40 hours/week × 52 ÷ 12 = $3,467 gross monthly income
Freelancers or Gig Workers: Self-employed workers often have irregular income. In this case, add up your total earnings for the year (before expenses or taxes) and divide by 12 to get an average.
Example: $72,000 ÷ 12 = $6,000 gross monthly income
Gross vs. Net Income
There is a clear difference between gross income and net income which is as follows:
Gross income is the total earnings before any deductions.
Net income is the total earnings after tax, deductions, and any withholdings.
For lenders and applications, gross income is taken into consideration more than net income because it shows the financial capability of the borrower. However, for budgeting, net income is more important because it is the actual disposable amount.
Where to Find Gross Monthly Income
Calculating gross monthly income is not always a necessity. Documented proof of the gross monthly income can be found easily in:
Payment slips, under gross pay before any deductions and expenses are taken.
Usually, an employment contract or an offer letter will display an annual or monthly gross salary.
W-2s (employees) and 1099s (contractors) tax documents capture gross earnings.
Why Gross Monthly Income Matters
There is a series of decisions that can be made that gross monthly income will affect, such as:
To determine credit worthiness, lenders will calculate a debt-to-income (DTI) ratio. Your gross monthly income serves as one of the variables for the numerator of this ratio.
A good chunk of landlords requires renters to make 2 or 3 times the amount of rent.
Bankers use gross monthly income to make decisions regarding how much to lend you.
You can’t be on certain types of programs that offer government assistance. This is because there are programs that help you if you're under a certain gross income.
If you need professional assistance, reach out to our dedicated team today. Dimov Associates is ready to present expert aid.
FAQs
What does gross monthly income mean?
Gross monthly income is the total amount you earn each month before any taxes, insurance, or other deductions are taken out.
Is gross monthly income before or after taxes?
Gross monthly income is always calculated before taxes and other withholdings.
How do I calculate my gross income if I’m self-employed?
Add up all your business or freelance earnings for the year before expenses and divide by 12 to get your average gross monthly income.
Why is gross monthly income important for loans?
Lenders use your gross monthly income to measure how much debt you can handle and to calculate your debt-to-income (DTI) ratio when deciding how much to lend.
Does gross income include bonuses or commissions?
Yes, gross income generally includes salary, wages, overtime, bonuses, and commissions before any deductions.
