What is net income?
Net income refers to the amount an individual or business makes after deducting costs, allowances and taxes.
In commerce, net income is what the business has left over after all expenses, including salary and wages, cost of goods or raw material and taxes. For an individual, net income is the “take-home” money after deductions for taxes, health insurance and retirement contributions. Net income should ideally be greater than the expenditure to be indicative of financial health.
How to calculate net income
To calculate net income, take the gross income — the total amount of money earned — then subtract expenses, such as taxes and interest payments.
For the individual, net income is the money you actually get from your paycheck each month rather than the gross amount you get paid before payroll deductions. You may have some other sources of income such as Social Security checks, side jobs or investment income which can add to your net income.
Example of net income
Here are examples of net income for both a business and an individual.
Net income of a business
To understand the net income of a business, let’s look at Coca-Cola. The company, like all publicly traded companies in the U.S., regularly reports its revenues and expenses to the SEC four times per year.
For the three months ended April 2, 2021, Coca-Cola reported $9.02 billion in revenue. It also earned $66 million in interest and $417 million in equity and other income. The company spent $3.505 billion on the cost of goods sold, which includes raw material and direct labor costs, $2.669 billion on general and administrative expenses, $124 million on other operating expenses, $442 million on interest payments and $508 million on taxes.
Overall, this brings Coca-Cola’s net income to $2.255 billion. Here’s the math:
( $9.02 billion + $66 million + $417 million ) – ( $3.505 billion + $2.669 billion + $124 million + $442 million + $508 million ) = $2.255 billion
Net income of an individual
As for an individual’s income, imagine that Jane receives a biweekly paycheck with gross pay of $3,350. She pays $272.51 in federal taxes, $46.61 in Medicare taxes, $193.31 in Social Security taxes, $102.48 in state taxes, and $125 for insurance. This leaves her with a net income of:
$3,350 – $272.51 – $46.61 – $193.31 – $102.48 – $125 = $2,610.09 every paycheck or $67,862.34 per year
Why understanding net income is important
Understanding net income is important because it helps clarify how much can be spent on living expenses as well as discretionary spending.
Here’s a business example. Let’s say a business reports a gross revenue of $2 billion per month. That may seem like a relatively healthy business that may be worth investing in. But if the company reports a net loss of $200 million, you’ll likely have a very different view of the financial health and viability of the business.
For an individual, net income is important because it’s the number an individual should think about when spending and building a budget. Someone who gets a new job earning $4,000 each month might only have $3,000 (or less) to spend after taxes and other payroll deductions. If they spend $4,000 each month, they’ll find themselves in a deep financial hole very quickly. If they look at net income instead and make sure budgeted spending is below their net income, they could instead start saving money for the future.
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FAQs
To calculate net income, take the gross income — the total amount of money earned — then subtract expenses, such as taxes and interest payments.
What is net income How is it calculated? ›
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. Here's how to find net income: Net income = Gross income − Deductions.
How do you calculate minimum net income? ›
Basically, net income gets calculated as revenues minus any expenses, taxes and interest.
How do you calculate net income to complete the statement? ›
The net income is calculated by subtracting revenue by operating costs—such as cost of goods sold (COGS) and selling, general, and administrative (SG&A)—and non-operating costs, like interest expense and taxes.
What is the difference between net income and income? ›
Per definition, gross income is the total amount you earn, and net income is actual business profit after expenses and allowable deductions are taken out.
How do I calculate my net income? ›
To calculate net income, take the gross income — the total amount of money earned — then subtract expenses, such as taxes and interest payments. For the individual, net income is the money you actually get from your paycheck each month rather than the gross amount you get paid before payroll deductions.
How to calculate total income? ›
To calculate your annual gross income, you can multiply your gross pay by the number of pay periods you have in a year. To figure out your annual net income, subtract whatever is withheld in federal, state and local taxes—plus other deductions—from your gross pay.
What is the formula for net salary? ›
Net Salary = Gross salary – All deductions like income tax, pension, professional tax, etc. Net salary is also referred to as Take Home Salary.
How do you calculate net working income? ›
To calculate NOI, you add all revenue and then subtract operating expenses—typically expenses directly tied to property management, including real estate taxes, insurance, utilities, and maintenance.
How to calculate personal income? ›
Personal Income and Disposable Personal Income
- Personal Income (PI): This measures all of the income that is received by individuals, but not necessarily earned. ...
- PI = NI + income received but not earned - income earned but not received. Disposable Personal Income (DI): ...
- DI = PI - Personal Income Taxes.
Net income, or net earnings, is the bottom line on a company's income statement. It's calculated by subtracting expenses, interest, and taxes from total revenues. Net income can also refer to an individual's pretax earnings after subtracting deductions and taxes from gross income.
How to figure out net worth? ›
How Do I Calculate My Net Worth? Subtract your total liabilities from your total assets. Your total assets will include your investments, savings, cash deposits, and any equity that you have in a home, car, or other similar assets. Total liabilities would include any debt, such as student loans and credit card debt.
What is a good profit margin? ›
An NYU report on U.S. margins revealed the average net profit margin is 7.71% across different industries. But that doesn't mean your ideal profit margin will align with this number. As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin.
How to calculate Ebitda? ›
How to Calculate EBITDA
- EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization.
- EBITDA = Operating Income + Depreciation + Amortization.
- EBITDA = $10,000,000 (net income) + $5,000,000 (interest) + $5,000,000 (taxes) + $3,000,000 (depreciation and amortization)
Essentially, net income is your gross income minus taxes and other paycheck deductions. It's what you take home on payday. To calculate it, begin with your gross income or the amount you earn from all taxable wages, tips and any income you make from investments, like interest and dividends.
Are gross and net the same? ›
Gross means the total or whole amount of something, whereas net means what remains from the whole after certain deductions are made.
What is your net income percentage? ›
Once you've calculated the net income (profit), simply divide this amount by the total revenue. To convert it to a percentage, multiply by 100.
Is your net income the same as the amount of your what? ›
Your net income is the same as the amount of your paycheck. It is the money you actually take home after all taxes and deductions have been subtracted from your gross income. Gross income is the total income you earn before any deductions are made.
