What is the difference between gross income and taxable income?

October 6, 2016 / Reading: 3 minutes

The IRS determines how much of your federal income tax is owed based on your gross income. There are specific tax codes that can affect it, which change based on taxable pay, not your gross pay. That is simply what all of your income is in one calendar tax year.

All of this information, including your wages, tips, go on your W2 with an employer’s signature; if you’re self-employed, then you’d of course handle it yourself and are liable to be audited in the future.

Taxable pay

This is what your taxes are in regards to your gross income. The taxpayer subtracts the expenses and qualified deductions, after taking into account the spouse and dependents exemptions. If you’re self-employed, you will also list your business and medical expenses, as well, then after everything has been calculated, this becomes your taxable pay.

If you bring home over $20 in tips each month, some states require that you keep records of all your tips and report it to the employer. It doesn’t matter how you are tipped, whether in cash, tip jars, or off the bill itself. Cabbies, waiters, bouncers, musicians, all need to report tips as taxable income with the help of their employers, otherwise it’s not valid.

State taxable pay

When working with state tax code, there are more deductions and write-offs available to further adjust your taxable pay. There are major deductions that can effectively reduce your taxes to $0, for things like equipment and office renovations.

Not all states have their income taxes, though, these include:

  • Alaska
  • Florida
  • New Hampshire
  • Nevada
  • South Dakota
  • Texas
  • Tennessee
  • Washington
  • Wyoming

Gross vs. Taxable Pay

The gross pay is basically unaffected by the state or government authority. It is only the total aggregate of the person’s salary, tips, and wages earned amid the year from all sources. For the IRS, the taxable pay is the government’s balanced gross pay. For the state taxable income, the assessable pay is the resulting government gross income.

Getting to taxable income from gross income

For most people, the reason for going to places like H&R Block is to get the gross salary down to the lowest possible taxable pay amount for every tax year. The most well-known approach to finish this assignment is to separate your deductions on an assessment form, particularly in the event that you are independently employed.

You might want to take a standard tax credit issued by the IRS every year to diminish your gross wage where there are lower tax brackets accessible for you to understand. In spite of what your gross pay might be, you ought to be most focused on the total taxable income on your yearly filing.

Understanding the distinction between certain duty terms including gross salary and assessable wage takes into account a much smoother experience every year, and might likewise guarantee that self-employed and entrepreneurs are just paying what is owed in light of assessable wage alone.

DISCLAIMER : While the information in this article is derived from sources believed to be accurate, it is not intended as tax or legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. It is always best to check with the IRS and see what their current rules and options are.