What It Means
Net income is what remains after the subtractions, and it has two meanings. (1) On a paycheck, it's the pay left after tax withholding and other deductions. The Consumer Financial Protection Bureau (CFPB) uses net income and take-home payTake-home payThe money that actually reaches you from a paycheck after taxes and other deductions are taken out, also called net pay or net income. See more for the same thing, and pay stubs usually say net pay. (2) For a business, it's the profit left once every expense, including interestInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more and taxes, has been subtracted from revenue, the figure the SEC calls the bottom line of the income statement.
Try It: Work Out Net Income Two Ways
Pick a meaning, then change any number. The starting numbers are examples.
Expenses are larger than revenue, so the bottom line is a net loss.
How It Sounds at Home
- "My net is about $1,800 every two weeks."
- "Sales were up, but net income barely moved."
- "What's the bottom line after taxes?"
The Breakdown
Formula
- On a paycheck: net income = gross payGross incomeThe full amount you earn before taxes and other deductions come out. For federal taxes, it's all income you receive unless a law exempts it. See more minus taxes withheld minus other deductions.
- For a business: net income = revenue minus the cost of what was sold, operating expenses, interest and taxes.
Worked example 1: a paycheck. The same example as on the take-home pay page:
| Line | Amount |
|---|---|
| Gross pay | $2,500.00 |
| Taxes withheld (income tax, Social Security, Medicare) | minus $491.25 |
| Other deductions (retirement, health insuranceHealth insuranceA plan you pay a premium for that covers part of your medical costs, while you pay your own share through a deductible, copays and coinsurance. See more) | minus $220.00 |
| Net income | $1,788.75 |
Worked example 2: a small bakery's year (made-up numbers):
| Line | Amount |
|---|---|
| Revenue | $120,000 |
| Flour, butter, packaging | minus $42,000 |
| Rent, wages, utilities | minus $55,000 |
| Interest and taxes | minus $6,000 |
| Net income | $17,000 |
What the result means. The paycheck figure is the money a household budgetBudgetA plan for a set period, usually a month, that lists the money you expect to receive and how you'll spend or save it. See more has to work with. The bakery kept about 14 cents of every sales dollar, which is its net profit margin. Had its costs come to more than $120,000, the bottom line would have been a net loss.
Good to Know
Check which meaning is in play before you compare numbers, since a person's net income and a company's net income are measured differently. The SEC's Beginners' Guide to Financial Statements compares an income statement to a staircase: it opens with total sales and steps down through each cost until the bottom line shows what the company earned or lost in the period. For a paycheck, the CFPB's pay stub guide walks through each line between gross pay and net pay. If you run a small business, a tax professional can tell you which of its costs count as deductibleInsurance deductibleThe part of a covered loss you pay yourself before your home, renters or auto insurance pays the rest, set as a dollar amount or a percentage. See more expenses.
FAQ
Is net income the same as take-home pay?
On a paycheck, yes. The CFPB uses the two terms for the same thing: the money you receive after tax withholding and other deductions. For a business, net income means profit instead.
How do you calculate net income for a business?
Start with revenue, then subtract the cost of making and selling the product, operating expenses such as rent and wages, and interest and taxes. Investor.gov describes net income as the profit left after all expenses and taxes come off revenue.
Can net income be negative?
Yes, for a business. When expenses are larger than revenue, the bottom line of the income statement shows a net loss, as the SEC's guide explains.
Do It in Buhata
Budget in a separate Space
Record your take-home pay in Budget, and if you run a side business, give it its own Space in Buhata so its income, costs and net income stay apart from the household's.
Open BuhataRelated Terms and Categories
- Gross income
The full amount you earn before taxes and other deductions come out. For federal taxes, it's all income you receive unless a law exempts it.
- Take-home pay
The money that actually reaches you from a paycheck after taxes and other deductions are taken out, also called net pay or net income.
Sources
Consumer Financial Protection Bureau, "Teenagers and earning"; Consumer Financial Protection Bureau, "Understanding your pay stub"; Investor.gov (SEC), "Net Income"; U.S. Securities and Exchange Commission, "Beginners' Guide to Financial Statements"
- www.consumerfinance.gov/consumer-tools/money-as-you-grow/teen-young-adult/explore-earning
- files.consumerfinance.gov/f/documents/cfpb_understanding-your-pay-stub_tool_2021-08.pdf
- www.investor.gov/introduction-investing/investing-basics/glossary/net-income
- www.sec.gov/about/reports-publications/beginners-guide-financial-statements
Last updated .