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 is also referred to as your ‘take-home pay’ after taxes, insurance, retirement, and other deductions are made.

For businesses, net income refers to the amount a business has left after all deductions – including salaries and all expenses – are made.

Net income can be positive or negative, but for a business, it should be more than its expenses to be in a healthy financial position.

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 the net income of a business, subtract the total expenses from the total revenue. This will give you a figure that represents how much money is left over after all bills and other expenses have been 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.

It is important for business owners to track both sales and earnings so that they can make informed decisions about marketing strategies, pricing policies, or 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 other payroll deductions, if you start a new job earning $4,000 per month you might only have $3,000 (or less) to spend. You’ll quickly fall into a huge financial hole if you spend $4,000 a month.

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.

Read more: How To Make a Budget