What is net income?

Net income is the amount of money you actually take home after taxes and any other deductions have been removed. Think of it as your “real” income — the money that hits your bank account and is available for spending, saving, or investing. It’s different from your gross income, which is your total earnings before anything is taken out.

Your net income is key to managing your personal finances. It’s the foundation of any budget, savings plan, or long-term financial goal. Yet many people either don’t know how to calculate net income correctly, or they confuse it with their salary. Whether you’re a salaried employee, hourly worker, or self-employed, understanding your net income is essential for making informed financial choices.

Knowing your net income helps you see what you can truly afford, not just what you earn on paper. While it’s a key part of accounting in business, this is why it also matters at an individual level:

Budgeting: Your monthly spending plan should be based on your net income, not your gross income. This ensures you don’t accidentally overspend.

Saving: Whether you’re building an emergency fund or saving for retirement, your savings goals should be grounded in how much you actually bring home.

Financial planning: Major decisions like buying a home, paying off debt, or investing are more manageable when you understand your net income.

In short, net income gives you a realistic view of your financial health, allowing you to make better informed financial decisions.

Understanding how to calculate net income can give you more control over your finances, leading to peace of mind about how you manage your money.

Net income = Gross income - Taxes - Deductions

Gross income includes your wages, salary, and bonuses. For tax purposes, “gross income” also covers other earnings like interest, dividends, rental income, or side-hustle income, even though these don’t appear on your pay stub. Deductions may include:

• Federal and state taxes

• Social Security and Medicare

• Health insurance premiums

• Retirement contributions (like a 401(k))

• Other voluntary benefits

Some deductions are pre-tax (e.g., traditional 401(k), HSA, many employer health premiums), which reduce both taxable wages and take-home pay. Others are after-tax (e.g., Roth 401(k) contributions), which don’t lower taxable wages but still reduce take-home pay.

Let’s say you earn $70,000 per year in gross income. Here’s a simplified breakdown of the kind of deductions you might face:

• Federal and state taxes: $12,000

• Social Security and Medicare: $5,000

• Health insurance and retirement deductions: $3,000

$70,000 - $12,000 - $5,000 - $3,000 = $50,000 net income per year

That’s about $4,166 per month in take-home pay.

For freelancers or small business owners, where your earnings may vary month by month, the net income formula looks a bit different:

Net income = Business revenue - Business expenses - Taxes

Make sure to include all deductible expenses (like equipment, software, or mileage) to get an accurate picture. You’ll also need to factor in self-employment taxes, which are typically higher than employee tax rates as self-employed people pay both the employee and employer portions of FICA.

In the context of companies, net income is often referred to simply as profit. For larger companies, net income can be found on the company’s income statement, which shows revenues and business costs over a specific period. It’s important to consider deductions like depreciation of assets, which will impact the net income reported.

It’s easy to confuse annual income with net income, especially since both show up on tax forms or job offers. Here’s how they differ:

Annual income is your total earnings over a 12-month period before taxes or deductions. It includes your salary or wages, bonuses and commissions, investment income, savings interest, rental income, and anything you earn from a side hustle.

This number is useful when applying for loans or evaluating job offers, but it doesn’t reflect what you actually take home. That’s why it’s always important to consider your deductions before taking a new job, as a higher salary doesn’t always mean substantially more take-home pay.

With a clear picture of your net income, you can choose a savings account that matches your financial goals — whether it’s a high-yield savings account for your emergency fund, or a certificate of deposit (CD) to grow your money over time. By knowing what money you’ll actually have in your account, you’ll know how much you can afford to put away, making this a key figure to have in mind when planning ahead.

Taxes like federal income tax, FICA taxes, and state and local taxes should all be deducted when calculating your net income.

Yes, your net income is the same thing as your take-home pay.

If you know your net income, you can work out how much you can afford to put away each month, making it easier to set a realistic savings goal.

Net income is the money you will take home after withholdings, taxes, and other paycheck deductions. Adjusted Gross Income (AGI) is your gross income minus certain “above-the-line” adjustments (like the deductible part of self-employment tax, HSA contributions, or traditional IRA contributions). AGI is used to calculate taxable income and determine eligibility for credits and deductions, but is not the same as the income that hits your bank account.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.