Net income: What it is and how you calculate it

Net income is the amount of money you bring home after taxes and other deductions are taken out of your paycheck. For businesses, net income refers to the money that remains 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.

What you’ll learn:

• For individuals, net income refers to how much money is available after all deductions—like taxes, insurance premiums and retirement contributions—have been subtracted from your gross pay.

• For a business, net income is the money that remains after paying operating expenses, administrative costs, cost of goods sold (COGS), taxes, insurance and any other business expenses.

• Understanding net income can help you manage your finances more effectively. This may help you better plan for the future.

Net income can be defined as the amount of money that remains after all expenses have been deducted from your pay. But how net income is calculated and measured may differ slightly depending on whether you’re talking about an individual or a business.

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 remaining 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.

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.

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

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.

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. Gross profit is also shown on the income statement, reflecting the revenue after COGS but before other expenses. This is why net income is sometimes referred to as the bottom line.

Net income for a business can be expressed with this simple formula:

Net income = Total revenue − Total expenses

The formula can become more complicated when you break down the total expenses category, which can include things like operating expenses, taxes and the cost of goods sold (COGS). COGS is the amount of money a company spends on making or acquiring goods for resale. This can include costs connected to materials, labor and purchases.

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.

Here are some answers to frequently asked questions about net income and how to calculate it:

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.