Net income represents the total earnings of an individual or a business after all expenses, deductions, taxes, and other costs have been subtracted from total revenue. In fact, it’s the amount of money left over after accounting for everything that has been spent or owed.
Here is the Net Income Formula you can use for the calculation:
Net Income = Total Revenue (or Gross Income) – Total Expenses (or Deductions)
Example Scenario of what net income is.
John’s Monthly Finances: A Case Study
John is a freelance graphic designer. At the end of June, he sits down to calculate his finances to determine his net income for the month.
- Total Revenue or Gross Income: John had a good month. He completed several projects and earned:
- $3,000 from designing a website.
- $1,500 from creating a logo for a local business.
- $500 from a small banner ad project. Total Gross Income: $3,000 + $1,500 + $500 = $5,000. (You could also use our Gross Income Calculator to calculate your Total Monthly Income before tax)
- Expenses and Deductions: Being a freelancer, John has various costs and deductions:
- Operational Expenses:
- Software subscription: $50
- Rent for his home office: $400 (a portion of his apartment rent)
- Internet and phone: $100
- Taxes: As a freelancer, John sets aside 30% of his earnings for taxes. For June, this would be 30% of $5,000 = $1,500.
- Health Insurance: John pays $300 monthly for his health insurance plan.
- Retirement Contribution: He contributes 10% of his earnings to his retirement fund. For June, this would be 10% of $5,000 = $500. Total Expenses and Deductions: $50 (software) + $400 (rent) + $100 (internet/phone) + $1,500 (taxes) + $300 (health insurance) + $500 (retirement) = $2,850
- Operational Expenses:
- Net Income Calculation: Net Income = Total Gross Income – Total Expenses and Deductions Net Income = $5,000 (gross income) – $2,850 (expenses & deductions) = $2,150
So in the above case study, John’s Net Income is $2,150. I hope now you have a better understanding of the aforementioned definition. If you would like to calculate yours, you can use our free net monthly income calculator to get an overview of your monthly financial situation.
Net Income Components
As you may already know from the above case study, this income type takes two main elements and subtract one from the other to arrive at the final figure. These elements are:
Total Revenue or Gross Income
Gross Income or Total Revenue stands as the sum total of all earnings you receives before any deductions are made. It’s the financial starting point from which you can begin the journey of understanding your net income.
Main sources of Gross Income include:
- Salaries or Hourly Wages
- Bonuses
- Freelance or Contractual Earnings
- Investment Returns
- Rental Income
- Pensions and Annuities
- Royalties
- Alimony and Child Support
Total Expenses and Deductions
These are the amounts that are systematically subtracted from your gross income, paving the way to determine your net income. The main personal expenses and deductibles include:
Tax Deductions:
Income Tax: Allocated based on income bracket and residency region.
Other Taxes: Additional levies in some regions, e.g., local or city taxes.
Health and Wellness:
Health Insurance Premiums: Payments to maintain health coverage.
Medical Expenses: Costs not covered by insurance, like certain medications.
Future Planning:
Retirement Contributions: Allocations to retirement funds like 401(k)s or IRAs.
Savings: Contributions to savings accounts or fixed deposits.
Debt and Loan Repayments:
Mortgages: Monthly payments if you have a home loan.
Student or Personal Loans: Payments for educational or personal loans.
Credit Card Bills: Monthly credit card debt settlements.
Lifestyle and Miscellaneous:
Rent: Monthly payments for living space if rented.
Utilities: Bills such as electricity, water, internet, etc.
Transportation: Car maintenance, fuel, or public transit costs.
Charitable Donations: Contributions to charities or social causes.
Conclusion
Now that you have a better understanding of what net income is, you can easily do the calculations to get an overview of your finances. Here at Smart Finance Calc, you will find a wide range of financial calculators to help you in gaining more insights of different sectors in your financial comprehension.
