If you are examining an employment offer, applying for a loan, or filling in a rental application, you will notice the term “gross monthly income” for the first time. Gross monthly income is a term that is commonly used by lenders, landlords, and even financial institutions to assess the creditworthiness of an individual and get insight on the opportunities available to them in terms of housing and financing. But, what is the term and how is it calculated?
Introduction
Gross monthly income is the total payment that an individual receives by the end of every month. This payment is in total before any subtractions, e.g., tax, social security, health insurance, and retirement contributions:
- The term is used by lenders to assess if an individual has the financial ability to pay back a mortgage, car loan, or even a credit card.
- Renters and landlords use the term to assess if an individual will be able to pay their monthly rent.
- Employers are the ones that use the term the most in terms of job offers so that employees are able to analyze different payment offers easily.
- The term used is a figure that illustrates the financial capability of a person without the expenses or withholdings taken into consideration.
How to Calculate Gross Monthly Income
The methods you use to calculate gross monthly income varies based on the type of work you are engaged in:
Salaried Employees: For individuals that receive a fixed yearly payment, you only need to divide the amount by 12.
Example: 60,000÷12=5,000 gross monthly income
Hourly Employees: In cases when hourly work is available, total hours worked in a week are multiplied by the hourly wage, which is then multiplied by 52. This is then divided by 12.
Example: 20/hour×40hours/week×52÷12=3,467 gross monthly income
Freelancers or Gig Workers: Self-employed workers tend to earn income in a more ‘lumpy’ fashion. In this case, all income added throughout the year (before expenses or tax) is available, which is then divided by 12 to provide a monthly figure.
Example: 72,000÷12=6,000 gross monthly income
Gross vs Net Income
Understanding the difference between net income and gross income is key.
- Gross income = your total earnings before deductions.
- Net income = your take home earnings after tax and withholdings.
Gross income is important and needed by lenders and applications because it demonstrates financial ability. For personal budgeting, net income is more relevant because it demonstrates actual spending ability.
Where to Find the Gross Number?
You don’t always need to calculate it by yourself. Many times Gross Monthly Income can be found on:
- Pay stubs – which lists ‘gross pay’ before deductions.
- Employment contracts or offer letters – commonly show gross salary allocated on an annual or monthly frequency.
- Tax paperwork – W-2’s (for employees) and 1099’s (for contractors) show gross earnings.
Why Gross Monthly Income Matters
Many financial decisions are made based on your gross monthly income, including the following:
- Credit worthiness – lenders use your income and debts to calculate your DTI.
- Housing eligibility – landlords typically need an income that is a certain multiple of the monthly rent.
- Loan approvals – banks use your gross monthly income to determine how much they can lend.
- Government benefits – there are certain programs that set eligibility parameters using the gross income thresholds.
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FAQs
What does gross monthly income mean?
Your total earnings for the month before any deductions are taken out.
Is gross monthly income before or after taxes?
Before taxes and withholdings (e.g., Social Security, insurance, retirement).
How do I calculate my gross income if I’m self-employed?
Total all pre-expense yearly income, then divide by 12.
Why is gross monthly income important for loans?
Lenders use it (with your debts) to assess repayment ability and loan amounts.
Does gross income include bonuses or commissions?
Yes—any earnings before deductions, including salary, bonuses, and commissions.