How to Calculate Net Income

Your net income is what you take home after income taxes and other deductions are made. This is different from gross income, which reflects your income before any deductions are made.

Net income, also known as your ‘take-home pay,’ is the amount left after taxes, insurance, retirement contributions, and other deductions.

For businesses, net income is the amount remaining after all deductions, such as salaries and expenses, are made.

It can be either positive or negative, but to maintain a healthy financial position, a business needs a net income that exceeds its expenses.

Calculating Net Income

To calculate your net income, take your total amount of money earned (gross income) and subtract all payroll deductions.

Your net income is what you get from your paycheck every month. So, the formula for net income is quite straightforward:

Total Earnings – Payroll Deductions = Net Income

If you have other sources of income, like investments or Social Security, you can add this to your net income.

Tax Returns and Net Income

In the U.S., taxpayers report their annual earnings to the IRS by submitting Form 1040. The form itself doesn’t have a line for net income but there is room to report adjusted gross income as well as your taxable income.

Most pay stubs will also have a dedicated line for net income.

Net Income for Business

To calculate net income, subtract total expenses from total revenue. This gives the amount left after all bills and expenses are paid.

The net income formula for a business is:

Revenue – Cost of Goods Sold – Expenses = Net Income

Sometimes it can be helpful to break this down by category to get a more detailed picture of where the profits are coming from.

Business owners should track both sales and earnings to make informed decisions on marketing strategies, pricing, and expansion plans. Every successful company uses different platforms like marketing campaign management software.

In addition, tracking taxes may help ensure error-free filings every year.

Here is an example of net income:

Comfort Shoes has a total revenue of $60,00 and they want to find their net income. Their expenses are as follows:

• Rent: $5,000
• Cost of goods sold: $15,000
• Utilities: $1,000
• Advertising: $500
• Payroll: $12,000
• Interest expense: $1,000

So to calculate the net income, we take:

$60,000 (gross income) – $15,000 (COGS) – $19,500 (expenses) = $25,500

The net income of Comfort Shoes is $25,500, which is what’s left over after all expenses have been subtracted.

Why Net Income Is Important

Net income is important to understand for individuals it is the figure that they should consider when they are spending and creating a budget.

After taxes and payroll deductions, if you start a new job earning $4,000 per month, you may only take home $3,000 (or less). Spending the full $4,000 each month could quickly lead to significant financial trouble.

You could start saving money for the future if you instead focus on net income and ensure that budgeted spending is less than your net income.