What is net income? Definition, how to calculate it
What is net income? Definition
Net income refers to the amount that an individual or business earns after deducting costs, allowances, and taxes.
In commerce, net income is what is left with the business after all expenses, including wages and salaries, the cost of goods or raw materials, and taxes. For an individual, net income is the âtake awayâ money after deducting taxes, health insurance and pension contributions. Net income should ideally be greater than expenses to indicate financial health.
How to calculate net income
To calculate net income, take gross income – the total amount of money earned – then subtract expenses, such as taxes and interest payments.
For the individual, net income is the money you actually get from your paycheck each month rather than the gross amount you receive before payroll deductions. You may have other sources of income such as Social Security checks, side jobs, or investment income that can add to your net income.
Example of net income
Here are some examples of net income for a business and an individual.
Net business income
To understand the net income of a business, let’s look at Coca-Cola. The company, like all publicly traded companies in the United States, regularly reports its income and expenses to the SEC four times a year.
For the three months ended April 2, 2021, Coca-Cola reported sales of $ 9.02 billion. She also earned $ 66 million in interest and $ 417 million in equity and other income. The company spent $ 3.505 billion on cost of goods sold, which includes raw materials and direct labor costs, $ 2.669 billion on general and administrative expenses, $ 124 million on other expenses. operations, $ 442 million in interest payments and $ 508 million in taxes.
Globally, that brings Coca-Cola’s net income to $ 2.255 billion. Here is the calculation:
($ 9.02 billion + $ 66 million + $ 417 million) – ($ 3,505 billion + $ 2.669 billion + $ 124 million + $ 442 million + $ 508 million) = $ 2.255 billion dollars.
Net income of an individual
With regard to an individual’s income, imagine that Jane receives a bi-weekly paycheck with a gross salary of $ 3,350. She pays $ 272.51 in federal taxes, $ 46.61 in Medicare taxes, $ 193.31 in Social Security taxes, $ 102.48 in state taxes, and $ 125 in insurance. This leaves him with a net income of:
$ 3,350 – $ 272.51 – $ 46.61 – $ 193.31 – $ 102.48 – $ 125 = $ 2,610.09 per paycheck or $ 67,862.34 per year.
Why Understanding Net Income Is Important
Understanding net income is important as it helps clarify how much can be spent on living expenses as well as discretionary expenses.
Here is an example of a business. Let’s say a business reports gross revenue of $ 2 billion per month. It may seem like a relatively healthy business worth investing in. But if the business reports a net loss of $ 200 million, you will likely have a very different view on the financial health and viability of the business.
For an individual, net income is important because it is the number an individual should think about when spending and budgeting. Someone who gets a new job and earns $ 4,000 a month might only have $ 3,000 (or less) to spend after taxes and other payroll deductions. If they spend $ 4,000 a month, they will very quickly find themselves in a deep financial hole. If they look at net income instead and make sure that the budgeted expenses are less than their net income, they might instead start saving money for the future.
You can sign up for Bankrate’s myMoney to categorize your spending transactions, identify ways to reduce and improve your financial health.