What is net income & how do you calculate it?
August 2, 2022 7 min read
Net income is the amount of money you bring home after taxes and deductions are taken out of your paycheck. For businesses, net income refers to the money left over after business expenses have been paid.
Learn more about what net income is, how to calculate it and how to use it to budget better.
- Understanding net income may help you manage your finances more effectively. This may help you better plan for the future.
- Net income refers to the money you may have available after taxes and deductions are taken out of your paycheck.
- For a business, net income is the money that’s left over after paying operating expenses, administrative costs, cost of goods sold, taxes, insurance and any other business expenses.
Why net income is a key metric
How net income is calculated and measured may differ slightly depending on whether you’re talking about an individual or a business.
So why is net income important?
For individuals, net income matters because it shows you how much money you may be able to spend. And for a business, net income is the amount of money left over after all expenses are paid.
Knowing your net income, or net pay, can be a good way to budget and look for areas where you could cut back on spending. And for businesses, it can also offer a picture of how much profit a company is bringing in.
Net income for individuals
Preparing for a healthy financial future takes planning. Whether you want to pay off debt, create a manageable budget or save for a home, understanding net income could be the first step in managing your money.
How to calculate net income
Calculating net income is pretty simple. Just take your gross income—which is the total amount of money you’ve earned—and subtract deductions, such as taxes, insurance and retirement contributions.
Gross income – deductions = net income
Net income example for individuals
Let’s say your gross income is $3,350 a month. But you pay $272.51 in federal taxes, $102.48 in state taxes, $46.61 in Medicare taxes, $193.31 in Social Security taxes and $125 for insurance. And these are all deducted from your paycheck before you get it. Calculating your net income might look like this:
$3,350 – $272.51 – $102.48 – $46.61 – $193.31 – $125 = $2,610.09
Your net income, which is sometimes called take-home pay, is $2,610.09. Knowing your take-home pay each pay period can help you create a budget for living expenses and any financial goals you may have.
Businesses and net income
A company’s net income—sometimes called net earnings—could be seen as a way to measure how profitable the business is. So net income can be one of the most important numbers for a business to know.
Companies often use an income statement, which typically shows all income and expenses. The net income is usually found at the bottom of the income statement. So it’s sometimes referred to as the bottom line.
How to find net income for a business
When trying to figure out business net income, start with the total revenue and then subtract business expenses, operating costs and taxes. The number you get after doing that represents the company’s net income.
When a company has more revenue than expenses, it has a positive net income. But if there are more expenses than revenue, then that’s a negative net income, or net loss.
One other thing to know when figuring out net income for a business is the cost of goods sold (COGS). According to Bankrate, COGS includes the amount of money a company spends on making or acquiring goods for resale. This can include costs connected to materials, labor and purchases.
Example calculation of net income for businesses
Let’s say you just opened a pizza shop, and your accountant wants to see how the shop is doing for the first quarter. Your numbers are:
- Total revenue: $60,000
- COGS: $20,000
- Rent: $6,000
- Utilities: $2,000
- Payroll: $10,000
- Marketing: $1,000
- Miscellaneous expenses: $1,000
To find the gross income, subtract COGS from total revenue:
Total revenue – COGS = gross income
$60,000 – $20,000 = $40,000
Now add up the expenses:
Total expenses: $6,000 + $2,000 + $10,000 + $1,000 + $1,000 = $20,000
To find the net income, take the gross income and subtract the total number of expenses:
Gross income – total expenses = net income
$40,000 – $20,000 = $20,000
So the net income for the pizza shop for the quarter is $20,000.
Net income is important because it shows how much money is coming into and leaving a business.
Net income FAQs
What’s the difference between net income and gross income?
For individuals, the difference between gross income and net income is that gross income is the total earnings before deductions like taxes and retirement contributions are taken out. Net income is what’s left.
For businesses, net income is the number you get when you subtract business expenses, operating costs and taxes from total revenue. And a company’s gross income is the total revenue minus COGS, or cost of goods sold.
Where can I find my net income listed?
For individuals, you can usually find it on your pay stub. For businesses, net income can usually be found on the bottom line of a company’s income statement.
Are there net income calculators online?
Yes, you can find a net income calculator online that can help you find your monthly net income or annual net income.
Net income in a nutshell
Whether it’s for personal or business finances, knowing your net income can help you get a clearer picture of where you stand financially.
For individuals, it’s important to understand your net income for a few reasons. It can help you budget and be in a better position to reach savings goals you might have. Learn more about how to make a budget that works for you.