What Is Net Income

What is net income? That’s a good question, especially if it’s tax time and you’re trying to figure out exactly how much income tax you owe. Net income differs from gross income and is essentially what you’ve got leftover after you deduct what you can’t put into the bank account from what you can.

Net income from a business standpoint. Net income in a business is determined after that business deducts its business-related expenses, depreciation and any taxes it owes. Things like building upkeep, paying for internet access, services, utilities and any other purchases made that forwarded or kept the business running are all taken out before net income is determined.

Expenses and taxes and such are deducted from a business’s gross income. To understand what net income is, you must know that gross income comes first. Say a company sold 1,000 computers over the course of the year. Assuming each of these computers cost $1,000, that company made a gross income of $1,000,000. That sounds like a lot of money. However, that business has overhead to factor in. Advertising costs, paying for electricity and water all gets deducted from that $1,000,000. All of a sudden, a business’s net income goes down, and their earnings look like less.

Net income from a personal standpoint.  If you’re not a business, but you work for one, net income is similar, but not quite the same. Your gross income is the money you made working at your job total. The net income from that job comes after you’ve paid into social security and any other taxes.

If you work for yourself, net income differs even more. Now you have your own business and personal expenses to think about. Did you have to pay for internet access for your self employment? If so, that comes out of your gross income for a lesser net income. The good news is, you won’t have to pay income tax on that expense, because you didn’t get to take it to the bank.