Net Income — Payroll Definition
What is left after subtracting everything owed — for a person, income after taxes and deductions; for a business, revenue minus all expenses.
What is left after subtracting everything owed — for a person, income after taxes and deductions; for a business, revenue minus all expenses.
Net income has two distinct meanings and the right one depends on who is using it. For an individual it is income left after taxes and other withholdings — over a pay period this is the same thing your stub calls net pay, and over a year it is total income minus the tax on it. For a business it is the bottom line of the income statement: net income = total revenue − cost of goods sold − operating expenses − interest − taxes. Both senses share the same logic, subtracting everything owed from everything earned, but the individual version starts from wages and the business version starts from revenue.
Example: Business: $500,000 revenue − $380,000 total expenses − $25,000 tax = $95,000 net income
Net Income for an Individual
For a worker, net income is what remains after federal, state, and local income tax, Social Security and Medicare, and benefit deductions come out of gross income. Per paycheck that number has a payroll name — net pay, or take-home pay — and it is the figure that matches the deposit in your bank account. Over a full year, an individual's net income is total income minus the tax actually owed on it. Because withholding is only an estimate that gets reconciled at filing, annual net income and the sum of the year's net pay usually differ by the amount of your refund or balance due.
The Net Income Formula for a Business
Net income = total revenue − cost of goods sold − operating expenses − interest − taxes. Written compactly, net income = revenue − total expenses. The full income statement builds it in steps: revenue minus cost of goods sold gives gross profit; minus operating expenses such as salaries, rent, and marketing gives operating income; minus interest and taxes gives net income. A negative result is a net loss. Net income is the number earnings-per-share is computed from and the starting line of the cash flow statement.
Net Income vs. Net Pay vs. Profit
Net pay is the per-paycheck, per-person version and appears only on a pay stub. Net income is the summary version and appears on a tax return or an income statement. Profit is looser still: gross profit, operating profit, and net profit are three different lines, and only net profit is a synonym for net income. Net income also differs from cash flow — depreciation and other non-cash charges reduce net income without moving cash, so a profitable company can be short of cash and a cash-rich one can post a loss.
Frequently Asked Questions
- What is the net income formula?
- Net income = total revenue − cost of goods sold − operating expenses − interest − taxes, which condenses to revenue minus total expenses. For an individual the parallel formula is total income minus taxes and other withholdings, which per paycheck is gross pay minus every deduction.
- Is net income the same as take-home pay?
- For an individual over a single pay period, effectively yes — take-home pay is the payroll name for the net amount after all deductions. The terms diverge for a business, where net income means revenue minus all expenses, and over a full year, where withholding is trued up at filing.
- Is net income before or after taxes?
- After. Taxes are the last expense subtracted, which is why net income sits at the bottom of an income statement and is called the bottom line. The figure before taxes and interest is operating income, not net income.
- Where do I find net income on an income statement?
- On the last line. The statement flows from revenue at the top down through cost of goods sold to gross profit, then operating expenses to operating income, then interest and taxes to net income at the bottom.
- What is the difference between net income and gross income?
- Gross income is measured before subtractions — all income for a person, or revenue minus cost of goods sold for a business. Net income is what is left after every remaining expense and tax. Gross income is always the larger of the two.