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# Net income vs gross income: what’s the difference? and how to calculate

August 12, 2024
Bill Kimball

It’s the income from sales of the business, after deducting sales returns and allowances (discounts). If your business sells products, calculate COGS and deduct it to reduce gross income. Each small business creates and uses an income statement (profit and loss statement) to show the income and expenses of the business for a period of time. Next, limit your needs category to expenses like groceries, rent or mortgage payments, utilities, health insurance, necessary transportation expenses and medicine. Although the final 20% is for your savings and debt payments, the minimum monthly payment for any debt you have should go into the needs category.

## Gross Income Formula

It merely tells you which one generated more income according to how that company accounts for its expenses. Revenue is the total amount earned from sales for a particular period, such as one quarter. Revenue is sometimes listed as net sales because it may include discounts and deductions from returned or damaged merchandise. Keep reading to learn how to calculate net vs gross income, the difference between net and gross income, their uses in decision-making, and best practices for calculation and analysis. The net income of a business may be different for tax and accounting purposes because some expenses are tax deductible and others are not.

## How do companies use net vs gross income figures?

Net income is the remaining revenue after deducting expenses from the total revenue. In other words, net income is the amount you make after factoring in all of your costs. Like gross income, you can calculate net income for your personal finances or business. For business owners, gross income is calculated by subtracting the cost of goods sold, or COGS, from the total revenue earned by sales.

## How to calculate net income

Gross profit, operating profit, and net income are shown on a company’s income statement, and each metric represents profit at different points of the production cycle. Derived from gross profit, operating profit is the residual income after all costs have been included. Operating profit is also called operating income or earnings before interest and taxes (EBIT). EBIT can include nonoperating revenue, which is not included in operating profit. If a company doesn’t have nonoperating revenue, then EBIT and operating profit will be the same.

Many employers offer retirement plans where you can contribute by having deductions made from each paycheck. Some of these contributions are pretax, giving you the advantage of saving for retirement while lowering your tax liability. In a different example, Macy’s reported all components needed as part of the Q report for the period ending Oct. 28, 2023. However, the company’s consolidated statement of income does not explicitly state gross profit. Looking further down the financial statements, you’ll notice that’s a far cry from the \$1.4 billion of net income (earnings) the company reports. Though most of this difference is due to selling, general, and administrative (SG&A) expenses, Best Buy also paid \$370 million of income tax.

It covers all a company’s revenue sources, such as sales, interest on investments, and rental income. Gross income is a snapshot of the company’s financial health by indicating its earnings before subtracting costs like overheads, salaries, taxes, and other operational expenses. Net income represents a company’s overall profitability after all expenses and costs have been deducted from total revenue. Net income also includes any other types of income that a company earns, such as interest income from investments or income received from the sale of an asset. Gross profit represents the income or profit remaining after production costs have been subtracted from revenue. Net income is the profit that remains after all expenses and costs, such as taxes, have been subtracted from revenue.

It makes sense to withhold the maximum amount you can contribute to tax-advantaged retirement accounts, as this both lowers your taxes and helps you build a nest egg for your retirement. You can sign up for Bankrate’s myMoney to categorize your spending transactions, identify ways to cut back and improve your financial health. The bottom line is a company’s net income and the last number on a company’s income statement. The bottom line is a company’s income after all expenses have been deducted from revenues.

However, each one represents profit at different phases of the production and earnings process. Calculating gross income is a straightforward process that requires information about the total revenues and the cost of goods sold (COGS). In conclusion, gross income may be viewed as an indicator of operational efficiency at the core level while net income reveals overall economic viability. From an operational efficiency perspective, net income gauges how well the company uses resources to generate profits.

Gross income is the total amount earned before deductions, such as taxes, employee withholdings, benefits, loan payments, and other obligations. It includes all sources of revenue, from sales, interest, and investments, and is often seen as the starting point for calculating available liquid cash. The tax that a small business pays for income tax isn’t directly related to its net income. Small business taxes are passed through onto the owner’s personal tax return. The business owner pays income taxes based on their total income from all sources, including net income from their business, income as an employee, and income on investments.