How to Calculate Net Income

Calculating net income is a necessary task, whether you’re figuring out your personal budget or trying to determine the health of your company. Calculating net income involves simple math, but it can become rather confusing when looking at the different terms necessary to do your calculations.

To learn how to calculate net income for both individuals and businesses, we’ve put together everything you’ll need to know, and given examples to help clarify the process.

What is Net Income?

The definition of net income varies slightly depending on the situation. Net income looks a little different when calculated for an individual versus a business. 

For Individuals

For an individual, net income is what you make after subtracting taxes and any other deductions you have held out from your total income (also known as gross income). Net income is the money you take home on your paycheck.

For Businesses

Net income is the money you make after you’ve subtracted your expenses, taxes, and interest. Compared to profit, net income is a more accurate depiction of what your business makes, since it measures the money you can use after you’ve paid for everything else associated with your business.

It’s important to understand your business’s net income, as this amount of money is what you have leftover. You can use it to pay yourself and invest it back into your business to help continue to grow it.

Other Important Terms Defined

Before calculating net income, it’s necessary to understand a few associated terms so that you can find everything you need to make your calculations.

Revenue

Revenue refers to the amount of money your business makes from selling goods or services. You may also hear it referred to as your business’ top line or gross sales. Put simply; revenue is the amount of money you make before subtracting any expenses.

Cost of Goods Sold

Cost of goods sold refers to the amount you must spend in order to  purchase any goods that you resell. Or, if your company produces its own product, the cost of goods sold includes the raw materials and labour required to manufacture the product.

If your business is service-based, you may or may not have a cost of goods sold. If there are costs associated with providing your particular service, then it may count. If it’s money you spent while making a sale, it counts as the cost of goods. If it’s money you would spend regardless of a sale, then it’s likely an expense. 

Expenses

Expenses are the costs associated with your business outside of what you pay for your products. These costs include whatever you need to operate your business, such as rent, employee payments, utilities, and more. 

These costs aren’t directly associated with your sales and are usually things you pay regularly.

Taxes

Taxes refers to the business taxes you pay based on the type of business structure you have. This doesn’t include your personal income taxes.

Interest

If you have any loans associated with your business, you’ll need to calculate the interest you pay on those loans to figure out your net income.

Gross Income

Gross income is the profit made after subtracting the cost of goods sold. It doesn’t include any other expenses. Gross income is sometimes useful in calculating net income.

For individuals, gross income is the amount of money you make before taxes, or any other deductions that are held out.

Calculating Net Income

Calculating net income can be pretty straightforward. In this section, we’ll cover how to calculate your net income as both an individual and as a business.

Calculating Net Income as an Individual

If you’re an individual, calculating net income is simple. You’ll start with your gross income, either for the month or for the year. You’ll also need to figure out what deductions and taxes are being deducted. Be sure to check for things like retirement, medical, dental, and life insurance.

To figure out net income, add up all taxes and deductions and subtract from your gross income.

Net income = gross income – (taxes + deductions)

Calculating Net Income for a Business

Calculating net income for a business is slightly more complicated. In order to figure out your monthly or annual net income, you’ll first need to gather some figures. 

You’ll need to know your revenue, cost of goods sold, operating costs, and any other expenses, like interest and the amount of taxes paid by your business. Then you can subtract all of those costs from your revenue.

Net income = revenue – (costs of goods sold + operating costs + other expenses)

If you already know your gross income, you can also use it to figure out your net income. Take your gross income and subtract any expenses to get your net income.

Net income = gross income – all other expenses

Calculating Operating Net Income

As a business owner, it may be important for you to calculate your operating net income. This number can give you (and potential lenders or investors) a more accurate depiction of your business’s overall health.

Operating net income doesn’t include anything you spend outside day-to-day operating expenses, such as taxes and interest. You will only focus on selling, general, and administrative (SG&A) expenses. Some examples of SG&A include rent, inventory costs, equipment expenses, and payroll. 

To calculate operating net income, you will subtract operating expenses and the cost of goods sold from your revenue.

Operating net income = revenue – (costs of goods sold + operating costs)

An Example Using the Net Income Formula

If you’d like to see the net income formula in action, we have a couple of examples.

Net Income Calculation Example for an Individual

Consider this example: Mark makes C$68,000 in gross income each year. He has C$14,960 held out each year in taxes. He also has C$4,625 for health insurance and C$312 held out for life insurance. 

Mark will use this formula to calculate his annual net income:

1. Net income = gross income – (taxes + deductions)
2. Net income = C$68,000 – (C$14,960 + C$4,625 + C$312)
3. Net income = C$68,000 – C$19,897
4. Net income = C$48,103
5. Mark’s annual net income is C$48,103.

Net Income Calculation Example for a Business

Here’s another real-life example: Jessica owns a printing business that takes in C$117,600 in revenue per year. She spends C$27,822 on costs of goods sold (materials and manufacturing). 

Her operating expenses include store rental, utilities, marketing, and equipment maintenance. These costs total C$34,768. She has additional expenses, like taxes and interest, that total C$15,640 

Jessica will use this formula to calculate her net income: 

1. Net income = revenue – (costs of goods sold + operating costs + other expenses)
2. Net income = C$117,600 – (C$27,822 + C$34,768 + C$15,640)
3. Net income = C$117,600 – C$78,230
4. Net income = C$39,370

Jessica’s annual net income for her small business is C$39,370.

Why Understanding Net Income Is Important

As an individual, you need to know your net income because that is the money you take home after all taxes and other expenses get deducted. You’ll make decisions about your budget, how much debt you can take on, and more based on this number.

For businesses, net income is also important. It can be exciting to get caught up in revenue numbers, but revenue isn’t always an accurate depiction of how your business is doing. A high revenue may show you that sales are up and may lead you to think the business is doing well, but it can be deceiving. 

For example, your business may be bringing in a lot of money. But if your cost of goods sold and operating costs are high, the business may not be doing as well as you think.

Net income allows you to see what your business has leftover after making sales and then paying all of the necessary expenses.

Final Thoughts

With these simple formulas, you can easily learn how to calculate net income. These processes will help you to use your net income to determine how you or your business is doing financially and show you where you can progress or grow.