You know how much money you can lose if you own your own business. It can be difficult to calculate how much money you will take home after paying for office supplies and employee wages.
You can use Net Income to assess the financial success of your business.
This comprehensive guide will teach you how to calculate your net income and the formula.
What does net income mean?
What you need to Know about Net Income
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Net income is what’s left after all expenses and taxes are paid in a period.
This number can be used to…
- Calculate the earnings per share of a company
- Assess the financial health of a business
Net income is also known as the bottom line of a business, net profits or net earnings. This number can be found at the bottom of the income statement for your business.
Net income is the term used by individuals to describe their earnings after taxes and retirement contributions.
Gross vs. Net income: What is the difference?
Gross income and net profit are different numbers that represent the phases of buying and selling.
Gross income is the amount of money a company earns after subtracting the costs of production and sales. It’s also called the COGS (cost of goods sold).
Use the Gross Income Formula to calculate your gross earnings.
Gross income = Total revenue – Total cost of goods sold
After you’ve learned the difference between gross income and net income let’s look at another common measure of profitability, operating income.
What is the difference between operating income and net income?
Operating income is the profit generated by your business after all operating expenses. Operating expenses include utilities, office supplies, payroll and property tax.
Use the formula below to calculate your operating profit:
Operating Income = Gross income – Operating Expenses
Calculating your operating income will let you know how much your business generates in a day’s work before taxes and other expenses.
Net income formula, explained
Net income formula
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This formula can be used to calculate your net income.
Net income = Total revenue – Total expenses
You can also calculate your net income using the formula below if you want to do it in more detail.
Net income = Total Revenue – Cost of Goods Sold + Taxes + Interest on Debt
Let’s look at each item that is used to calculate net income.
Revenue
Revenue, also known as net sales or total revenue, is the amount of money that your business earns by selling products and services over a period of time. You may have revenue from non-operating activities in addition to the revenue generated by your core business.
Non-operating revenues include:
- Interest Income
- Profits from the sale or transfer of assets and equipment
- Dividend Income
The top of your income statements will show you how much revenue is in your account.
Costs of Goods Sold
COGS is the total cost of goods sold and produced by your business.
COGS examples include:
- Cost of raw materials
- Wages for production workers
- Equipment Costs
- Repair and maintenance costs
- Manufacturing facilities utilities
- Shipping Costs
These costs can vary depending on the business. They may be affected by production output, material cost, and other economic factors, such as inflation.
Expenses
The expenses are those costs that your business faces in its normal course of operations, but which are not directly connected to the production or sale of goods. Your income statement will include them.
Examples of common expenses include:
- Advertising and marketing costs
- Employee Training Expenses
- Legal Fees
- Employee Benefits Programs
- Insurance
- Office Leases
You should also note that certain expenses can be deducted from your taxes if they’re deemed to be ordinary and necessary business expenses.
Taxes
The structure of your company and your location will determine the amount of business tax you pay.
Here’s a quick overview of taxes that you might have to pay.
- Income Tax — You will pay income tax throughout the year on all of your earned taxable earnings.
- Estimated tax —If your business is self-employed, you will need to pay estimated taxes.
- Self Employment Tax — If your work is self-employment, you will pay this tax in order to contribute towards Medicare and Social Security benefits.
- Employer taxes — You’ll be paying various taxes as an employer. These include Social Security, Medicare and federal unemployment tax (or FUTA).
- Excise tax — Depending on your business, you may be required to pay these taxes. Fuel, air transportation and environmental taxes are examples.
This guide by the Internal Revenue Service will help you determine what taxes might apply to your situation.
Interest on debt
You’ll need to include any interest due on debts when calculating your net profit.
Interest can be charged on debts in the following ways:
- Loans
- Bonds
- Business credit cards
Calculating net income
There are many ways to calculate and find out your net income, whether it is for you or your company.
We will review how to calculate your net income by using a formula for net income and financial statements.
How to calculate the net profit for a business
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Consider this example of a net profit for Business A. At the end of its accounting period, the business has earned…
- Revenue $500,000
- Costs of Goods Sold $300,000.
- Expenses $100,000
- Debt Payments up to $6,000
- Tax Payments of $4,000
The income of Business A would be $90,000 (500,000 – 300,000 – $100,000 – $6,000 – $4,000).
Calculating net personal income from tax returns
You can calculate your personal net income using the numbers on your Form 1040, your Individual Income Tax Return.
Subtract the total tax amount from Line 15 to arrive at your total.
Here is an example.
- Line 15 – $85,000
- Line 24 – $10,000
Your income is $75,000 (equal to $85,000 minus $10,000).
Calculating net personal income from paystubs
Your net income is the number that appears on your pay slip. This will be your income minus any taxes, and if applicable, any retirement contributions or other deductions.
Take a look, for example, at the paystub of Employee A.
- Earnings $4,000
- Taxes on $800
- Retirement Contribution $250
The income of Employee A would be $2,950 (4,000 – $800- $250).
Net income FAQs
Find out how to calculate your net income.
Are net profits the same thing as net income?
Both terms represent the difference between your income and expenses but their meanings are different. The word “profit” is used to describe any remaining revenue after subtracting expenses. Net income, on the other hand is a number that you can find at the bottom of your income statement or using the net profit equation.
Is net income after taxes?
Net income is what’s left after subtracting all expenses, taxes, costs of goods sold and interest.
How can I calculate my net income from my gross income?
You can calculate your net earnings by subtracting your income from your expenses and taxes.
Is gross profit or net income higher than the other?
Gross profits tend to be higher. Net income is lower than gross profit because it subtracts expenses, taxes, and interest from debt.
How can I find out my net income?
Your net income can be found at the bottom of your statement.