You can come up with a net income figure for an individual or business. However, the way you’ll do it varies a little depending on the specific situation.
For a business, net income represents earnings after all costs and taxes have been dealt with. For individuals net income is calculated by starting off with gross income. By adding in the impact of deductions and tax obligations, you come up with net income – the amount you’re ultimately left with in your pocket.
This guide walks through how to calculate net income for either a business or an individual, and tackles some common questions you may have.
What is net income?
Net income can be calculated for both businesses and individuals, although the way you work out these figures is slightly different.
In basic terms, net income represents what’s left from earnings once unavoidable expenses are deducted. For a business, these costs include everything involved in running a company, from paying staff to interest on development loans. For individuals, the math is less complex. Instead you’ll calculate income after taxes and deductions have been taken into account.
Net income for businesses is used to analyze and forecast profitability, and figure out earnings per share. This information is important to investors and shareholders. For individuals, knowing your net income means you can budget and plan your personal expenses – and double check your tax details and withholdings are correct.
Net income formula
The way you calculate net income will depend on whether you’re working out the net income of a business or an individual. However, the principle is the same.
Here’s what you need to know.
Calculating net income for businesses
The basic calculation for business net income is:
Net income = total revenue – total expenses
The expenses you need to deduct to calculate net income depend somewhat on the type of business involved. As you’d imagine, a small business selling web design services will have different operating expenses to a florist or construction company. However, there are some common costs involved with running any type of business such as payroll, costs of equipment or rent for a location, and tax.
You may need to take into account the following:
- Cost of raw materials
- Labor and production costs
- Operating expenses such as rent and utilities
- Administrative expenses
- Costs of marketing and selling
- Taxes
- Interest on loans and debts
- Depreciation
Personal net income calculator
Your personal net income is what you’re left with once you’ve paid all taxes you owe, taking into account any deductions you’re entitled to. There are 2 basic stages to figure this out – calculating your taxable income, and then using this to get net income.
Before you know what tax you need to pay, you’ll need to calculate your taxable income using this formula:
Taxable income = gross income – deductions
Deductions available will vary by individual but could include things like student loan interest, tax credits, or deductions against charitable giving, for example. Remove any deductions you’re entitled to from your gross income to get the taxable income used to calculate your tax obligations.
You can then use the following formula to get your net income:
Personal net income = taxable income – taxes payable
If you’re looking for your personal net income to help you figure out your tax obligations or tax withholding, it’s good to know the IRS has tools to help. Check out the online resources on the IRS website.
Net income on tax returns
US tax returns don’t actually show your net income. Instead, on Form 1040 you’ll need to complete your gross income, and then remove some income sources such as social security payments, as well as some deductions, to record your adjusted gross income. Adjusted gross income doesn’t take into account all deductions or tax, so it’s not the same as your net income.
There’s then a further step to remove other deductions which produces your final taxable income figure. From this you can calculate your own net income – or you can look for the information on your paycheck instead.
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Does net income include tax?
For both businesses and individuals, net income is used to show earnings after tax.
To work out your personal net income, you’ll need to calculate your total earnings once tax and deductions have been factored in. Business net income is calculated by removing all costs, including operating expenses, payroll and tax from gross earnings.
Gross vs net income
Gross and net income are different things.
For a business, gross income is calculated by taking the total amount of income made by selling a product or service, and removing only the direct costs of goods. For an individual, gross income refers to the total amount a person earns, before taxes and deductions.
Net income is usually a smaller number for both businesses and individuals, as it is calculated after all expenses are removed.
These costs for a business include operational costs, marketing, interest and taxes, for example. For an individual, net income is calculated by taking gross income and then factoring in the impact of deductions and tax liabilities.
Knowing your personal net income is helpful for budgeting, and to make sure your tax withholding is where you want it to be. For businesses, net income information is useful for investors and analysts as it gives a good indication of how profitable the company is. Use the simple calculations in this guide to get you started working out your own net income.
