5 differences between gross income and net income

 Running a business means paying attention to your income—but it’s not just about monitoring how much money comes in. It’s also about understanding what’s left after you’ve paid the bills.

That’s why understanding how gross income differs from net income can make a big difference.

You’ll see both numbers on your income statement, and each provides valuable information—they’re like two sides of the same coin. Getting comfortable with what they mean can help you make smarter decisions, whether you’re planning your budget or assessing the profitability of your business. 

Keep reading to learn more.

What you’ll learn:

• Gross income shows your total earnings before expenses. It provides a view of your business’s revenue potential.

• Net income reveals your actual profit after expenses. It’s essential for assessing your business’s financial health.

• Gross income helps guide pricing and sales strategies, while net income informs budgeting and long-term planning.

• Understanding the difference can lead to smarter financial decisions.

Gross income, also called gross profit, is the total revenue your business earns from selling products or services minus the cost of goods sold (COGS). COGS includes the direct costs of producing what you sell, like materials, labor or manufacturing expenses.

For example, if your business brings in $600,000 in revenue and your COGS is $300,000, your gross income would be $300,000. This number shows how efficiently you’re producing and selling your goods—and it’s a key starting point for understanding your overall profitability.

Net income is what’s left after you subtract all costs from your gross income. This includes both COGS and operating expenses such as:

• Rent

• Utilities

• Salaries

• Taxes

• Interest

And any other business-related expenses.

In other words, net income is your bottom line—the actual profit your business made during a specific period. It’s the number that shows whether you’re truly in the black after covering all the costs of running your business.

For example, if your gross income is $300,000 and you spend $250,000 on operating costs, taxes and other expenses, your net income would be $50,000. This number is key when evaluating profitability, securing funding or making long-term plans.

Gross income and net income are both important, but they serve different purposes—and looking at them side by side can give you a clearer picture of your business’s financial health. Here’s a breakdown of each:

• Gross income: Represents how much you’re earning before any other costs are factored in. It can help you measure productivity, track trends and estimate your business’s potential.

• Net income: Shows what you’re actually keeping after paying all your expenses. It’s the number that tells you whether your business is profitable and by how much.

Both numbers appear on your income statement and work together to tell the full story. Comparing them can help you spot rising costs, slim margins or opportunities to improve efficiency.

At a glance, gross income and net income might look similar—but they tell you two very different things about your business. Here’s how they compare:

• Total earnings: Gross income (or gross profit) represents what your business makes from sales after subtracting direct costs from production. It measures revenue efficiency and earning potential.

• Remaining income: Net income is what remains after subtracting every business expense, from rent and payroll to taxes and interest. It reflects the actual profit you can reinvest, pay yourself or save.

Think of it like this: Gross income shows what’s coming in, and net income shows what’s sticking around.

One of the most significant differences between gross and net income involves what gets deducted and when.

Gross income is calculated before most expenses are taken out. It only subtracts COGS, which includes the direct costs tied to producing your products or services. Expenses like rent, payroll and utilities aren’t included yet.

Net income, on the other hand, comes after all deductions. That means operating expenses, taxes, interest and any other business costs have been subtracted. What you’re left with is the true measure of your business’s profitability.

Looking at both numbers together can help you understand not just how much you’re earning but also where your money is going.

Gross income is useful when you’re looking at potential—how much your business is bringing in before expenses. It can help you spot sales trends, estimate growth and assess overall demand for your product or service.

But net income is what helps you plan. It shows how much money you actually have to work with after all expenses are covered. That makes it especially important for budgeting, forecasting and making day-to-day decisions—like whether you can afford to hire, expand or pay down debt.

In short, gross income is about what could be; net income is about what is.

Both gross and net income come into play at tax time, but in different ways.

Annual gross income helps determine the total revenue your business generated and may be used in various tax calculations, depending on your business structure. It’s also a number the IRS pays attention to when evaluating eligibility for deductions or credits.

Net income, on the other hand, tells you whether your business is actually making a profit. It’s the figure lenders, investors and you—as the owner—often care most about when assessing your business’s financial health.

So while gross income helps you stay tax ready, net income keeps you strategy ready.

Gross and net income can both support smarter decision-making, though from different angles.

Gross income can help evaluate your pricing strategy, track sales trends and decide whether it’s time to scale. It gives you a sense of how your offerings are performing and where there may be room to grow.

Net income plays a bigger role in financial planning. It can help you decide whether you can afford to hire, invest in equipment or take out a loan. Because it reflects your actual profit, it’s a key number for long-term strategy.

Put simply, gross income can help you spot opportunities, while net income can help you act on them.

If you want to see both your gross and net income in action, look no further than your income statement. Sometimes called a profit and loss statement (P&L), it lays out your business’s revenue, expenses and profits over a specific period.

Gross income typically appears near the top of the statement—just below total revenue and COGS. Net income generally shows up at the bottom—after all other operating expenses, taxes and interest are subtracted—which is why it’s often called your bottom line.

Reviewing your income statement regularly can help you track trends, catch rising expenses early and gain a better understanding of how much of your revenue is actually turning into profit.

Gross income shows how much your business brings in before expenses—it can help you track sales and understand your revenue potential. Net income reflects your actual profit—it shows what’s left after expenses and helps assess your business’s financial health.

Knowing the difference can help you make smarter choices because together, they give a clearer picture of your business’s financial performance.

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