Net income is what’s left after you subtract all taxes, deductions, or expenses from the money you started with. The exact calculation depends on whether you’re looking at a paycheck, a business, or self-employment earnings, but the core logic is always the same: start with total earnings, subtract everything that comes out, and the remainder is your net income.
Net Income on a Paycheck
If you’re trying to figure out your personal net income, you’re looking for your take-home pay. Start with your gross income, which is the total amount you earned before anything is taken out. Then subtract every deduction on your pay stub.
The mandatory deductions include federal income tax, state income tax (if your state has one), Social Security tax, and Medicare tax. Social Security and Medicare are collectively called FICA taxes. Your employer withholds your share of these from each paycheck automatically.
Beyond taxes, your paycheck likely has voluntary deductions too. These can include health insurance premiums, contributions to a 401(k) or other retirement plan, dental or vision insurance, life insurance, and flexible spending account contributions. All of these reduce your gross pay before it hits your bank account.
Here’s a simple example. Say your gross pay for the month is $5,000. Federal tax withheld is $600, state tax is $200, Social Security is $310, Medicare is $72.50, and your health insurance premium is $150. Add those deductions up ($1,332.50) and subtract from gross pay. Your net income is $3,667.50. That number should match the deposit in your bank account.
Your pay stub lists all of this. Look for a line labeled “net pay” or “take-home pay” at the bottom. If you’re estimating net income before you receive a paycheck (for budgeting or comparing job offers), use a paycheck calculator online and enter your salary, filing status, and state. The result won’t be exact, but it gets you close.
Net Income for a Business
For a business, net income appears at the bottom of the income statement (sometimes called a profit and loss statement). The SEC outlines a standard sequence of subtractions that takes you from total revenue down to net income:
- Revenue: Total money earned from selling goods or services.
- Minus cost of goods sold (COGS): Direct costs of producing what you sold, like raw materials or manufacturing labor. This gives you gross profit.
- Minus operating expenses: Ongoing costs of running the business, such as rent, salaries, marketing, and office supplies. This gives you operating profit.
- Minus interest expense: Costs of borrowing money, like loan interest payments. This gives you income before taxes.
- Minus income tax expense: Federal and state taxes on your business profits. What remains is net income.
To see how this plays out with real numbers, consider a business with $835,000 in revenue. Subtract $250,000 in cost of goods sold to get $585,000 in gross profit. Subtract $210,000 in operating expenses to reach $375,000 in operating profit. Subtract $7,000 in interest expense to get $368,000 in pre-tax income. Subtract $77,000 in income taxes, and net income is $291,000.
If you’re looking at a public company’s financials, find the income statement in its annual report or quarterly filing. Net income is always the last line. For your own small business, your accounting software (QuickBooks, Wave, FreshBooks) generates this report automatically if you’ve been categorizing transactions.
Net Income for Self-Employment
If you’re a freelancer, independent contractor, or sole proprietor, your net income is your net profit: total business revenue minus all allowable business expenses. You report this on Schedule C when filing your federal tax return.
The IRS allows deductions across a wide range of categories. Common ones include office supplies, software and technology tools, advertising, insurance premiums, rent for a workspace, utilities, travel and lodging, 50% of business meals, vehicle expenses (either actual costs or the standard mileage rate), legal and accounting fees, contract labor you paid others, and the business use of your home.
You can also deduct larger purchases through depreciation, which lets you spread the cost of equipment or property over several years, or through a Section 179 deduction, which lets you write off the full cost in the year you bought it.
To calculate your self-employment net income, add up every dollar your business brought in during the year. Then add up every qualifying expense. Subtract expenses from revenue. That’s your net profit, and it’s the number the IRS uses to calculate both your income tax and your self-employment tax (the self-employed equivalent of FICA).
Net Income Is Not the Same as Cash
One important distinction, especially for businesses: net income and cash in the bank are not the same thing. Net income includes non-cash items that affect the calculation but don’t involve money actually moving. Depreciation is the most common example. When you depreciate a piece of equipment, it reduces your net income on paper, but you didn’t write a check that month for the depreciation amount.
Working in the other direction, a business might show healthy net income while being short on cash because customers haven’t paid their invoices yet (accounts receivable) or because the company invested heavily in inventory. The income statement says you’re profitable, but your bank balance tells a different story. If you need to know how much actual cash your business generated, look at the cash flow statement rather than just net income.
For individuals, this gap is much smaller. Your take-home pay is real cash deposited into your account, so personal net income and cash received are usually the same thing.
Quick Formulas to Remember
No matter which version you need, net income follows one pattern:
- Personal: Gross pay minus taxes minus voluntary deductions equals net income (take-home pay).
- Business: Revenue minus cost of goods sold minus operating expenses minus interest minus taxes equals net income.
- Self-employed: Total business revenue minus all allowable business expenses equals net profit.
If you’re filling out a loan application, rental application, or budget worksheet that asks for your net income, they almost always mean your take-home pay after taxes. When in doubt, use the deposit amount from your bank statement or the “net pay” line on your most recent pay stub.