How to Calculate Net Income

Knowing how much money you have helps you make financial projections and create a budget so you feel more prepared to weather the economic challenges you may face.  Understanding your net income is essential to managing your personal or business finances because you can use it to assess your financial health, make investments and purchasing decisions, and plan for your future. Explore the topic further and look at a net income formula to familiarize yourself with the practice and its implications.  

What is net income?

Net income is the profit or loss left after deducting your expenses from your revenue or gross income. You may hear some people refer to it by another name, like net pay, bottom line, or take-home pay, and they all refer to the same concept. No matter what they call this metric, business leaders and investors use net income to assess a company's profitability. Individuals can use the calculation to evaluate their financial health. 

Gross income vs. net income

Gross and net income refers to how much money you bring in but often reflect different amounts. Gross income is the total amount you earn from all sources, including wages, bonuses, dividends, interest, rental income, and more, before deducting any expenses and costs. Net income is what’s left after deducting taxes, expenses, and other financial obligations from your gross income.

Understanding the distinction between these two figures can be helpful when trying to get an accurate picture of your finances. For example, two people earning $100,000 yearly have the same gross income ($100,000). If one has $50,000 in taxes and expenses, that person has a net income of $50,000. If the other has $25,000 in taxes and other obligations, that person has a higher net income ($75,000). In this case, the second person may be in a better financial position because they have more discretionary income to spend however they want.

Net worth vs. net income

Net worth and net income are two financial terms that represent different aspects of a person's or organization's financial situation. Net worth is the difference between the value of your assets—cash, investments, property, and personal belongings—and your liabilities, which include loans, mortgages, liens, and other financial liabilities. It represents your overall financial position at a specific point in time and can be categorized as positive (you own more than you owe), negative (you owe more than you own), or zero (what you owe and owe are worth the same). 

Since net worth indicates how well-positioned you are to pay what you owe, it provides valuable insight into your financial health and ability to meet financial goals. Net income suggests a business' profitability and tells you how much discretionary income you have in your personal budget, but it's subject to your work status. Your net income drops if you lose a job, see a decline in sales, or work fewer hours. Your net worth is independent of your employment and can stay the same even when your work situation changes. 

Net income formula

The net income formula is simple. It is the difference between total revenue and all expenses, including taxes.

Net income = total revenue - total expenses

How to calculate net income for individuals

Calculating net income for individuals is relatively simple. Start by adding up all your expenses, including taxes and debt obligations. Then, subtract that number from the total income you earned during a given period. 

Here are possible deductions and expenses to include in the calculation:

• Mortgage or rent

• Car expenses like gas, repairs, and insurance

• Groceries and dining out

• Entertainment

• Utilities

• Cell phone

• Clothing

• Health insurance

• Monthly subscriptions and dues 

• Student loans

• Retirement savings

Example calculation

Suppose Nick earns a salary of $60,000 in a year. He contributes $5,000 to his retirement account, pays $12,000 in taxes, and spends $8,000 on other expenses. His total expenses for the year are $25,000. To calculate his net income, we can insert these numbers into the  formula as follows:

$60,000 - $12,000 - $5,000 - $8,000 = $35,000

Therefore, Nick’s net income for the year is $35,000.

How to calculate net income for businesses

Calculating net income for business owners tends to be more complex than for individuals. You must deduct all the business expenses, including the cost of goods sold, operating costs, interest, taxes, and depreciation, from the total revenue. 

Business expenses and deductions can include the following:

• Payroll

• Rent 

• Utilities

• Insurance

• Interest

• Equipment

• Computer software

• Furniture 

• Advertising and marketing costs

• Legal fees

• Shipping costs

Example calculation

Suppose ABC Company has a total revenue of $500,000 in a year. The cost of goods sold is $250,000, operating expenses are $100,000, interest is $10,000, taxes are $50,000, and depreciation is $20,000. All of this adds up to $430,000. To calculate the net income of ABC Company, we can use the formula as follows:

$500,000 - $250,000 - $100,000 - $10,000 - $50,000 - $20,000 = $70,000

Therefore, ABC Company's net income for the year is $70,000.

How to calculate net income in Microsoft Excel or Google Sheets 

Microsoft Excel and Google Sheets are powerful tools that individuals and businesses can use to calculate their net income quickly and efficiently. The formulas and calculations typically work the same in each application, which is good news if you prefer using one more than the other.

In both programs, the formula for calculating net income is the same:

Net income = total revenue - total expenses

For example, to use Excel or Sheets to calculate your net income if you have a total revenue of $100,000 and total expenses of $80,000, you would follow these steps:

1. Open a new sheet.

2. Enter the heading "Total Revenue" in cell A1, "Total Expenses" in cell B1, and "Net Income" in cell C1.

3. Enter the value for total revenue in cell A2 and total expenses in cell B2.

4. Enter the formula "= A2 - B2" in cell C2.

5. Press Enter to calculate the net income, which will appear in cell C2.

If you're using the information provided in the example above, you should see $20,000 in cell C2.

Getting started in finance with Coursera

Understanding how to calculate net income is essential to running a business and managing personal finances. Knowing what you have left to work with after expenses and taxes can help you budget and plan. 

Continue learning about financial concepts such as net income by completing a course or receiving a relevant certificate. Check out The Fundamentals of Personal Finance Specialization by SoFi, available on Coursera. This course is for beginners with limited prior experience in finance and is conducted entirely online for your convenience as a learner. 

If you’re interested in learning about financial topics more broadly, consider enrolling in Finance for Everyone Specialization by McMaster University. Topics include the language of finance, financial markets, and social issues connected to the world of finance. You can complete this Specialization in six months at a suggested pace of two hours per week and earn a shareable certificate when you finish it.