Personal Income Tax (PIT) Equation: Gross Income – There are various principles to note about gross income for tax purposes in Nigeria. These include the components of gross income, gross income formula, the difference between gross and total income, tax gross income, gross income before or after taxes, gross income calculator, taxable income and what is net income. In the write-up that follows, all of these tax principles are well explained. This is the Personal Income Tax (PIT) Equation for gross income.
As a matter of fact, for us to make better explanation of Gross Income for tax purpose in Nigeria our reference tax law is the Personal Income Tax Act as amended. This Act as much as it deals with individual tax payers and residence principles, is under the purview of the State Internal Revenue Service. Therefore, what is called gross income for tax purpose may also be affected by incomes earned in different state of the federation, especially for workers who work from place to place.
Personal Income Tax (PIT) Equation: Gross Income
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In the light of these, we want to present some relevant questions and answers in this post which are aimed at letting you have better understanding of this write-up. So for our readers, students, business men and women who seek for meanings of certain tax terms, here are they. They are so explained to enable you work with them. These explanations are so necessary for you to understand some of our previous write-ups in this subject matter – Personal Income Tax (PIT) Equation. Such earlier write-ups include:
- Personal Income Tax (PIT) Formula: PAYE Computation
- Personal Income Tax (PIT) Equation: PIT Computation for Sole Proprietor
- Computation of Sole Proprietor’s Tax Liability in Nigeria
- Sole Proprietor & Partnership Tax Conditions in Nigeria
- Taxation of a sole trader in Nigeria: Facts you must know
- How do I work out my taxable income in Nigeria?
I tell you, this post, Personal Income Tax (PIT) Equation: Gross Income, will help you understand what all these other posts are all about.
What is gross income? @ Personal Income Tax (PIT) Equation: Gross Income
Gross income is all you received and gained from all sources, before any deductions. “Gross”, actually means that an amount, value, weight, number, or the like, are presented without deducting associated costs or allowances.
What then is the difference between net and gross income?
With the explanation in Gross income above, Net income is what is obtained after deducting the necessary costs or allowances from the gross income.
How do I find my gross income?
For an employee, you can find your gross income in periodic setting. That is to say weekly, monthly and yearly. You simply multiply your hourly rate with number of hours concerned, or your weekly or monthly rate with relevant number of weeks or months respectively. However, this could just be your basic salary. Other allowances like for medical, transport and housing etc. would be added to the basic salary/wage to obtain your gross income.
For other individuals, your gross income will include every income you earned without deducting any cost or allowance. Therefore, you could talk about gross profit, with which you arrive with your net profit. For tax purpose, your Net profit is what matters here. So your net business profit plus your other incomes reported as gross is what give your gross income. The meaning here is that, even though taxes are already deducted from your investment incomes, or with-held in some transactions, you have to report them at their gross value. That means you will have to ” gross them up” again before adding them to the other incomes for tax purposes. You may ask why? This is to enure that there is a good disclossure of your income to the relevant authorities and to yourself too.
Personal Income Tax (PIT) Equation: Gross Income – How do you gross up net income?
This is simple. So, if you have suffered a 5% deduction that amounted to N15,000, to gross up or to find the original figure divide this N15,000 by the 5%. so 15,000/0.05 = 300,000. This was the original figure from where you paid the N15,000 and received only N285,000.
How do I work out my net income for tax purpose?
Please, do the following:
- Determine your gross income.
- Deduct any associated deductions like; Pension contributions, National Housing Fund contributions, National Health Insurance contributions, Life Insurance premium and other approved deductions as per PITA ( Personal Income Tax Act)
How do I work out my net home-take income ?
Now subtract from the net income derived above for tax purpose, what you owe in taxes.
What is considered my gross income if I’m self-employed?
Simply put, your gross income from your self-employment is the amount you earn for services you provide before expenses are considered.
Personal Income Tax (PIT) Equation: Gross Income – The Equation:
Gross Income = Wages and salaries + Bonuses + Allowances + Compensations + Benefits in kind + Pensions + Premiums + Business income + Percentage ownership + Rent + Fees + Commission + Interests and dividends.
- Pension and insurance premium paid for you by your employer is considered an income to you, even though you still need to deduct them before arriving at your net income for tax purpose.
- The components of the above equation does not apply to all individuals. E.g. only the self-employed or those employees that have property or investments that receive business income, rent, dividend and interest etc.
- For the Employee, the relevant portion of the Personal Income Tax Act states ” for the purpose of this section, ‘gross emoluments’ means Wages, salaries, allowances (including benefit in kind) gratuities, superannuation and any other incomes derived solely by reason of employment”
CONCLUSION @ Personal Income Tax (PIT) Equation: Gross Income
In this post, Personal Income Tax (PIT) Equation: Gross Income, we have taken our time to put together these principles that are very necessary in you being able to determine what your gross income is. We have done this with the understanding that there are both individuals on pay employment and those in self employment ( Sole Proprietors).
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Founder/Managing Partner of Complete Full Marks Consultants Ltd. An Economist turned Chattered Accountant and Tax Practitioner with over 37 years of industrial experience.