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It is important for both individuals and businesses to understand what net income is. It comes in handy when calculating your budget, filing taxes, cutting back on your expenditures, or determining how much profit a business brings in.
So what is net income? How to calculate net income? And what is the difference between net income and gross income?
Read on to find out this and everything else you need to know about net income so you can manage both your individual and business finances effectively.
What Is Net Income?
To put it simply, your net income (NI) is the money you get after paying off all your taxes and other deductibles. For businesses, it is the money left behind after all the expenditures and taxes, such as salaries, overhead costs, retirement contributions, and insurance.
The net income of a business should be greater than its expenses, in order to be financially afloat. It is important to know your net income so you can budget accordingly and find out ways to save.
On the other hand, a business can determine how much profit it makes by looking at its net income. Net income is also referred to as net profit.
What Is Net Profit?
The net profit of a business is the money left behind after its total expenses have been paid from the total revenue. The net profit of a company indicates its profitability. It varies from business to business and is also referred to as net earnings or net income.
How to Calculate Net Income?
To calculate your net income, you need to deduct all your expenses and taxes from your income. These can include all the expenses and social security taxes for individuals.
For businesses, it includes all the business expenses, such as operating costs, payroll, taxes, and inventory costs.
Here’s how you can calculate your net income by using the net income formula:
Net Income = Gross Income – (Benefits + Taxes)
Calculating Net Income for Businesses
The net income for a business is one of the most important metrics in determining its profitability. It can be found at the bottom of a company’s income statement.
To find the exact net income of a business, subtract its taxes, business expenses, and operating costs from its total revenue. The result would be the net income.
If your company’s revenue is greater than its expenses, you will get a positive net income or net profit. However, if the expenses are greater than its revenue, you will get a negative net income or net loss.
You will also need to know the cost of goods sold (COGS) of a business when calculating its net income. The COGS is the money spent on acquiring or making goods to be sold. This includes the raw material costs, labor, and any purchases made for the production or acquisition of the goods.
For example:
Let’s calculate the net income of a business with the following figures:
- Total revenue: $80,000
- Rent: $9,000
- COGS: $25,000
- Payroll: $12,000
- Utilities: $4,000
- Miscellaneous expenses: $2,000
First, let’s add up all the expenses:
Total expenses: $9000 + $12,000 + $4,000 + $2,000
Total expenses: $27,000
Now let’s calculate the gross income:
Gross income = Total revenue – COGS
Gross income = $80,000 – $25,000
Gross income = $55,000
Now calculate the net income by subtracting your total expenses from the gross income.
Net income = gross income – total expenses
Net income = $55,000 – $27,000
Net income = $28,000
So the net income of the above-mentioned business is $28,000.
Calculating Net Income for Businesses
For an individual, calculating the net income is important for a healthy financial future. It is actually really simple to calculate. You just have to subtract your deductions and taxes from the gross income.
For example:
Let’s calculate the net income of an individual with a gross income of $4,000 per month.
Here are the expenses and all the deductibles for this individual:
Federal taxes: $300
State taxes: $100
Social Security taxes: $200
Medicare taxes: $50
First, add up all of the deductibles:
$300 + $100 + $200 + $50 = $650
Now subtract your total deductions from the gross income to calculate the net income:
Net income = gross income – deductions
Net income = $4,000 – $650
Net income = $3,350
So the net income of the above-mentioned individual is $3,350.
What Is the Difference Between Net Income and Gross Income?
To find the right candidate to hire as a self-employed person or independent contractor, you can turn to several recruitment websites such as Upwork, Fiverr, LinkedIn, and Indeed.
Make sure to include the terms “independent”, “self-employed”, “flexible”, “contractor”, and “freelance” when searching for a 1099 employee.
Once you have found the right candidate, draft up a contract with them mentioning the payment mode (per-project or hourly) and the duration of the project. The contract will also include the nature of the work and specify that you are not hiring an “employee” for your company.
Also mention the payment structure, deadlines, confidentiality, ownership rights, and any other relevant details in the contract. Lastly, add a termination clause.
Once done, make sure you have all the right tax forms. When the tax deadline arrives, you will need a W-9 form and Form 1099-NEC. If you are paying more than $600 per year to your contractor, you will need to report these payments in a 1099-NEC form to the IRS and the contractor by January 31.
Pros and Cons of Being a 1099 Employee?
The final conclusion is that paying off a loan early can be advantageous, but only if you have the money to do so and your loan’s interest rate isn’t excessive. Consider holding your loan until it’s due if you don’t have the money or are paying a high-interest rate.
The benefits of being a 1099 employee include:
- Flexibility in terms of work hours, location, and pay.
- Freedom to choose the type of job you want.
Cons
There are a few drawbacks to being a 1099 employee, such as
No job security.
- No benefits, such as medical insurance or a 401(k).
- Too much autonomy over their work.
Can An Employee Receive a 1099 Form?
The only time when an employee can receive a 1099 form is when they are working as an independent contractor, a freelancer, or a self-employed individual. The 1099 form exists to distinguish between a regular employee and a self-employed contractor. So only a self-employed contractor can receive a 1099 tax form.
What Is the Difference Between Net Income and Gross Income?
Net Income vs. Gross Income
Net income is the amount of money a business gets after all the deductions and expenses. It is calculated by deducting all the expenses and taxes from the gross income.
Whereas gross income is the total money a business earns, before all the deductions and expenses. It is the sum of all your client billings before any expenses, taxes, or withholdings have been deducted.
The gross income is the total revenue a business earns. Whereas the net income is the total profit a business is left behind after deducting all the expenses.
Conclusion
The net income of an individual or a business is one of the most important key factors in determining their financial situation. It can help them determine their financial health and manage a healthy budget.
However, since the terms “net income” and “gross income” are often used together, it can be easy to get confused between the two. But now that you know the answer to “what is net income” and what the difference is between gross income and net income, you can make better financial decisions.
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