Net income is what’s left after you subtract all deductions, expenses, or taxes from your total earnings. The exact calculation depends on whether you’re looking at a personal paycheck, self-employment earnings, or a business’s financial statements, but the core idea is the same: start with the big number, subtract everything that comes out, and the remainder is your net income.
Net Income on a Paycheck
If you’re an employee, your net income is your take-home pay. It’s the amount that actually hits your bank account after your employer withholds taxes and other deductions from your gross pay (your full earnings before anything is removed).
To find it, start with your gross pay for the pay period. Then subtract these categories of deductions:
- Federal income tax withholding: The amount your employer withholds based on the W-4 form you filled out when you were hired.
- State and local income tax: Varies depending on where you live and work. Some states have no income tax at all.
- Social Security tax: 6.2% of your wages, up to the wage base of $184,500 for 2026. Once your year-to-date earnings pass that threshold, this withholding stops for the rest of the year.
- Medicare tax: 1.45% of all wages, with no cap.
- Voluntary deductions: Health insurance premiums, retirement plan contributions (like a 401(k)), dental or vision coverage, life insurance, flexible spending accounts, and similar benefits you’ve opted into.
The formula looks like this: Gross Pay minus Federal Tax minus State/Local Tax minus Social Security minus Medicare minus Voluntary Deductions equals Net Income.
Your pay stub already does this math for you. Look for the line labeled “Net Income” or “Net Pay” near the bottom. The Consumer Financial Protection Bureau defines net income on a pay stub as the amount of money you receive in your paycheck after taxes and other deductions are taken out. If your pay stub uses abbreviations you don’t recognize, your employer’s HR department can walk you through each line item.
Calculating Net Income When Self-Employed
If you run your own business as a freelancer or sole proprietor, net income works differently because nobody is withholding taxes for you. Your net income is your profit: the money left after subtracting your business expenses from your total revenue.
The IRS uses Schedule C (attached to your Form 1040) for this calculation. You report your gross receipts, which is the total money your business brought in. Then you subtract all ordinary and necessary business expenses: supplies, software subscriptions, advertising, home office costs, vehicle expenses, professional services, insurance, and anything else directly tied to running the business. The result is your net profit or net loss for the year.
Keep in mind that this net profit number isn’t the same as your final take-home amount. You still owe income tax on that profit, plus self-employment tax at 12.4% for Social Security and 2.9% for Medicare (since you’re paying both the employee and employer portions). Your true take-home is your net profit minus the taxes you pay on it. Most self-employed people handle this through quarterly estimated tax payments rather than one lump sum at tax time.
Net Income for a Business
When you’re looking at a company’s finances, whether it’s your own business or a company you’re researching as an investor, net income is the bottom line on the income statement. It represents what remains from total revenues after deducting all operating costs, taxes, interest, and other expenses.
The calculation follows a specific sequence:
- Start with total revenue: All the money the business earned from selling goods or services.
- Subtract cost of goods sold (COGS): The direct costs of producing what the business sells, like materials and manufacturing labor. This gives you gross profit.
- Subtract operating expenses: Rent, utilities, salaries, marketing, insurance, and other costs of running the business day to day. This gives you operating income.
- Subtract interest expense: Payments on any business loans or debt.
- Subtract taxes: Income taxes owed on the remaining earnings.
The result is net income. In formula form: Total Revenue minus COGS minus Operating Expenses minus Interest minus Taxes equals Net Income.
For example, if a business earns $500,000 in revenue, spends $200,000 on the products it sells, $150,000 on operating expenses, $10,000 on interest, and $30,000 on taxes, its net income is $110,000. That’s the actual profit the business generated for the period.
If you’re looking at a publicly traded company, you’ll find net income on the bottom line of its income statement in quarterly and annual filings. It’s sometimes labeled “net earnings” or “net profit.” For a small business using accounting software, the profit and loss report (also called an income statement) shows the same figure.
Net Income vs. Gross Income
The difference matters because these two numbers serve different purposes. Gross income is your starting point: total wages before deductions, or total revenue before expenses. Net income is the endpoint: what you actually keep or what the business actually earned after all costs.
When you apply for a mortgage or car loan, lenders typically ask for gross income. When you’re budgeting your monthly expenses, net income is the number that matters because it reflects the cash you actually have available. Mixing the two up can lead to overspending if you budget based on gross pay, or understating your qualifications if you report net income on a loan application that asks for gross.
Quick Ways to Check Your Net Income
For employees, the fastest method is checking your most recent pay stub. Multiply your per-paycheck net income by the number of pay periods in a year (26 for biweekly, 24 for semimonthly, 12 for monthly) to get your annual net income. You can also look at your bank deposits over a month and add them up, though this misses any deposits from non-payroll sources.
For self-employed workers, pull up your accounting software or spreadsheet and subtract your total business expenses from your total revenue for the period you’re measuring. If you filed taxes last year, your Schedule C shows your net profit on line 31.
For a business you’re evaluating, look at the income statement. Net income is always the last line. If you’re comparing companies, pay attention to the time period covered, since a quarterly net income figure will naturally be smaller than an annual one.