What is the formula for net income?
Net Income = Total Revenue – Total Expenditure
No matter how much you love what you do, it’s likely you’re working for a reason: money.
If you run your own business, you know the ongoing expenses that can eat into your pocket. From employee salaries to office supplies, it can be overwhelming to figure out how much you’ll actually take home after all these expenses.
Before you call your accountant, there is one metric that can help you gauge your company’s financial success: net income. And the best part is, you don’t have to be a math savvy to figure it out. Instead, you’ll only need the net income formula.
Follow this comprehensive guide to learn more about net income and how you can calculate it yourself.
What is net income?
Net income is the total amount a business earns after paying all taxes and expenses in a given period.
You can use this number to:
Net income can also be referred to as a company’s bottom line, net profit or net earnings. You can find this number at the bottom of your business’s income statement. For an individual, net income is a term often used to describe the amount of money you make after taxes and retirement contributions.
Gross Income Vs. Net Income: What’s the Difference?
While both numbers refer to a business’s profits, gross income and net income represent different stages of the buying and selling process. For example, gross income is a business’s earnings after deducting the cost of producing and selling products, also known as cost of goods sold (COGS).
To calculate your gross income, follow the gross income formula:
- Gross Income = Total Revenue – Total Cost of Goods Sold
Now that you know the difference between gross and net income, let’s take a look at operating income, another commonly used measure of profitability.
Operating Income Vs. Net Income: What’s the Difference?
Operating income represents the income generated by your business after any operating expenses. Operating expenses include payroll, utilities, office supplies and property taxes.
To calculate your operating income, follow the operating income formula:
- Operating Income = Gross Income – Operating Expenses
By calculating your operating income, you’ll know how much money your company makes from its day-to-day operations before paying taxes or any other one-time expense.
Net Income Formula Explained
Now that you have learned about Net vs Net. Gross Income and Net Vs. Operating income, you are probably wondering how you can easily calculate the net income of your business.
You can quickly determine your net income using this simple formula:
- Net Income = Total Revenue – Total Expenses
If you want to break it down into more specific steps, you can use this detailed formula to calculate net income instead:
- Net Income = Revenue – Cost of Goods Sold – Expenses – Taxes – Interest on Debt
Before you reach for your calculator and financial statements, continue reading to learn more about each of the items used to calculate your net income.
Sometimes referred to as net sales, revenue is the total amount earned by your company from selling goods and services in a given amount of time. In addition to revenue generated from the core activities of your business, you may also have non-operating revenue. Examples of non-operating revenue include:
- interest income
- revenue from the sale of property or equipment
- dividend income
You can find at the top of your income statement how much revenue you have.
cost of goods sold
COGS is the cost incurred in producing and selling your company’s goods. COGS includes:
- raw material cost
- wages for production workers
- cost of equipment
- repair and maintenance cost
- Utilities for manufacturing facilities
- shipping cost
Depending on your business, these costs can fluctuate based on production output, material costs, and other economic factors such as inflation.
Expenses are costs that your company incurs in the course of its specific course of business and are reported on your income statement. Some common examples of expenses include:
It is important to note that some expenses may also be tax-deductible if they are defined as necessary for ordinary and business operations.
Two things are certain in life: death and taxes. When calculating your net income, the business taxes you pay will depend on the structure of your business and where you live. To break things down, here’s a general overview of the taxes you may have to pay:
- Income tax: You will pay income tax on your taxable income earned throughout the year.
- Estimated Tax: You will pay this tax on income that is not subject to withholding, including interest, dividends and capital gains.
- Excise Taxes: You may pay these taxes depending on what your business does. Examples include fuel, environmental and air transport taxes.
To find out which taxes apply to you, see this guide from the Internal Revenue Service.
interest on loan
When calculating your net income, you’ll need to account for any interest you pay on outstanding debt. Examples of loans that may incur interest include:
Interest on a loan is generally calculated by multiplying the interest rate and the outstanding principal amount of the loan.
how to calculate net income
Whether you want to know the net income for yourself or your business, there are different ways you can find and calculate your net income. Follow along to learn how to determine your net income using the net income formula and financial statements.
Calculating net income for businesses
To better understand how to calculate a business’s net income, let’s look at this net income example for business A. Assume that at the end of the accounting period, Business A has:
- $500,000. revenue of
- $300,000. cost of goods sold
- $100,000 expense
- $6,000. loan payment of
- $4,000. tax payment of
business A Net income $90,000 . will be equal to ($500,000 – $300,000 – $100,000 – $6,000 – $4,000).
Calculating Personal Net Income Using a Tax Return
Although personal net income is not explicitly stated on your tax return, you can calculate it yourself using the numbers from your personal income tax return, also known as Form 1040. To do this, you would subtract the number listed on line 24 (total tax). ) from line 15 (taxable income). Here’s an example:
- Line 15: $85,000
- Line 24: $10,000
Your Net income $75,000 . will be equal to ($85,000 – $10,000).
Calculating Personal Net Income Using Pay Stubs
The number you see on your paycheck equals your net income for that pay period. This will include your income minus taxes and, if applicable, retirement contributions. For example, let’s take a look at employee A’s salary whereabouts:
- $4,000. earning of
- $800. tax of
- $250. retirement contribution of
Employee A Net income equals $2,950 ($4,000 – $800 – $250).
Now that you have learned the net income formula, it’s time to jump in and start calculating. You can then use your findings to make informed business decisions, improve your bottom line, and ultimately increase your net income, helping you achieve your long-term financial goals.
Frequently asked questions about net income
Have more questions? If so, follow along to learn the answers to common questions about net income and how you can calculate it yourself.
While both represent more income than expenditure, their definitions are contextually different. For example, the word “profit” describes any revenue that remains after deducting your expenses. Net income, on the other hand, is a specific number that you can find on the bottom line of the income statement or by using the net income equation.
Yes, net income is the amount left after deducting taxes, cost of goods sold, interest on debt and total expenses.
With an understanding of Gross Vs. Net income, you can calculate your net income by taking your gross income and subtracting your expenses, taxes and interest on the loan.
Gross profit is higher. Because net income subtracts your expenses, taxes, and interest on the loan, it will be a lower number than gross profit.
You can find your net income at the bottom of your income statement.
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