What is net income? Definition and how to calculate it
What is net income?
Net income refers to the amount an individual or business makes after deducting costs, allowances and taxes.
For companies, net income is what a business has left over after expenses, including salary and wages, cost of goods or raw material and taxes. For individuals, net income is “take-home” pay after deductions for taxes, health insurance and retirement contributions. Ideally, net income should be greater than expenditures — that’s a sign of financial health.
How to calculate net income
To calculate net income, take the gross income — the total amount of money earned — then subtract expenses, such as taxes and interest payments.
For individuals, net income is the money you actually receive from your paycheck each month rather than the gross amount you get paid before payroll deductions. You may have some other sources of income such as Social Security checks, side jobs or investment income which can add to your net income.
Examples of net income
Here are examples of net income for both a business and an individual.
Net income of a business
To understand the net income of a business, let’s look at Coca-Cola. Like all publicly traded companies in the U.S., Coca-Cola reports its revenues and expenses to the SEC four times per year.
For the three months ended Sept. 27, 2024, Coca-Cola reported $11.854 billion in revenue. It also earned $263 million in interest and $1.032 billion in equity and other income.
The company spent $4.664 billion on the cost of goods sold, which includes raw material and direct labor costs, $3.636 billion on general and administrative expenses, $1.044 billion on other operating expenses, $425 million on interest payments and $530 million on taxes.
Overall, this brings Coca-Cola’s net income to $2.850 billion.
Here's the math:
Net income of an individual
To calculate the net income of an individual, you need to know their tax rate (based on filing status, federal tax rate and state tax rate) and any deductions taken out of their paycheck, such as for health insurance or retirement plan contributions.
For example, let’s say Jane is single, lives and works in Minnesota and falls into the 22 percent federal tax bracket (that is, her marginal tax rate is 22 percent).
Jane receives a weekly paycheck with gross pay of $1,850. She pays $311.87 in federal taxes, $26.83 in Medicare taxes, $114.70 in Social Security taxes and $116.96 in state taxes. Before contributing to her retirement or paying for health insurance, she is left with a net income of $1,279.64 per paycheck or $66,541.28 per year.
Here's the math:
Why understanding net income is important
Understanding net income is important because it helps clarify how much can be spent on living expenses as well as discretionary spending.
Here’s a business example. Let’s say a business reports a gross revenue of $2 billion per month. That may seem like a relatively healthy business that may be worth investing in. But if the company reports a net loss of $200 million, you’ll likely have a very different view of the financial health and viability of the business.
For an individual, net income is important because it’s the number you should think about when spending and building a budget. If you get a new job earning $4,000 per month, you might only have $3,000 (or less) to spend after taxes and other payroll deductions. If you assume you have $4,000 to spend each month, you’ll quickly find yourself in a deep financial hole. If you look at net income instead and make sure budgeted spending is below your net income, you could start saving money for the future.
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