How To Calculate Net Income: Formula, Definition and FAQs
By Indeed Editorial Team
Updated October 17, 2022 | Published February 25, 2020
Updated October 17, 2022
Published February 25, 2020
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
After taxes and deductions, you may wonder how much money you actually make. Learning about net income and how to calculate it can help you determine how your salary and paycheck differ. Businesses also have a net income they calculate to maintain profitability.
In this article, we discuss what net income is, compare net income to gross income and provide steps you can follow to calculate net income.
What is net income?
Sometimes called "net earnings," net income (NI) is a calculation determined by subtracting taxes and deductions from a salary. Net income is what an employee actually receives compared to their salary or hourly wages. You can most likely find your net income listed on your pay stub. For businesses, net income involves subtracting the cost of goods sold (COGS), operating expenses, taxes and any other related costs from sales. The formula for calculating bet income is:
Revenue - COGS - expenses = net income
Income statements include net income as a profitability indicator that businesses use to determine their earnings per share. Since it appears at the bottom of an income statement, analysts refer to it as the bottom line. Investors analyze these numbers closely because in rare cases, revenue can be falsely inflated and certain expenses can be hidden.
Related: 20 Side Jobs To Make Extra Money
How to find net income
Calculating your personal net income may require you to research old records and do some math. It may seem daunting, but it's much easier once you have determined a process. Here are the steps to take:
1. Determine your gross annual income
The very first step is to find your gross income, or the total amount of money you earn before deductions. Find a previous pay period's pay stub and locate your deductions, if there are any. It lists the full amount before deductions. That value is your gross pay for that period. Next, find out when and how often you receive payment and multiply that figure by the gross pay. You can use the formulas below to find gross pay:
Bi-weekly gross pay x 26 = gross annual income
Hourly gross pay x number of hours per week x weeks in the year = gross annual income
2. Subtract deductions
The next step is to take all of your deductions into account and subtract them from your gross income. Net income refers to income after taxes, so you subtract deductions from your gross annual income. Once you remove the deductions, you have your total taxable income. Below is a formula you can use to find your initial total taxable income:
Gross income - deductions = total taxable income
3. If applicable, deduct medical and dental
If you have opted into any medical and dental or vision coverage, you can subtract those expenses from your taxable income. For example, if you had $50,000 in total taxable income, subtract your combined medical and dental/vision coverage. Assume that the combined coverage is $500. Below is the formula you can use to find total taxable income:
Total taxable income - (medical + dental) = new total taxable income
$50,0000 - $500 = $49,500
4. If applicable, deduct retirement
In certain circumstances, you can subtract your individual retirement account (IRA) from your taxable income. For example, if after previous deductions you had $49,500 in total taxable income, subtract your IRA amount. Assume that the IRA amount is $1,000. Below is the formula you can use to find your net total taxable income:
Total taxable income - IRA amount = new total taxable income
$49,500 - $1,000 = $48,500
5. Subtract what is owed
Once you have discovered your total taxable income, you can subtract the taxes you owe. You can start by adding together all owed taxes including federal, local, state, social security and Medicare. If your employer takes out taxes, you find the total deductions on your pay stubs. Next, subtract taxes from your income to determine your net annual income. For example, if you determine your gross income was $52,000, you had $2,000 in deductions, $500 for insurance coverage and $1000 for retirement. Finally, you have $3,000 in taxes, then your calculation is:
Taxable income - taxes = net income
$48,500 - $3,000 = $45,500
Net income FAQs
Here are answers to frequently asked questions about net income:
What's the difference between net income vs. gross income?
While net income refers to your income after deductions, gross income refers to your total or pre-tax earnings. It includes income from all sources, even outside of your primary job. Gross income also includes property and services, as well. For example, if you make $65,000 a year at your job. You also gather $500 per year in interest from a savings account and $1,000 per year in dividends from stock. Taking all of that into account, your gross annual income is $66,500.
Lenders can use your gross income to determine whether to trust you as a borrower. For example, if your gross income for the year is $50,000, and you want to borrow $10,000, the lender may decide to offer the funds since you make more than enough to pay off the loan.
What is operating net income?
Operating net income—also referred to as “Earnings Before Interest and Taxes” or “EBIT”—is very similar to net income but minus unrelated account income and expenses, such as income tax, interest income and gains or losses from sales of fixed assets. To calculate operating income, you would use the following formula:
Net income + interest expense + taxes = operating net income
Operating net income is typically the figure lenders and investors consider before making financial decisions, as it shows how profitable the company is.
This article is for information purposes only and is not intended to constitute legal advice; you should consult with an attorney for any legal issues you may be experiencing.
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