What is 'Net Income - NI'
Net income (NI) is a company's total earnings (or profit); net income is calculated by taking revenues and subtracting the costs of doing business such as depreciation, interest, taxes and other expenses. This number appears on a company's income statement and is an important measure of how profitable the company is over a period of time. Net income also refers to an individual's income after taking taxes and deductions into account.
BREAKING DOWN 'Net Income - NI'Businesses use net income to calculate their earnings per share (EPS). Business analysts often refer to net income to as the bottom line, since it is listed at the bottom of the income statement. In the United Kingdom, NI is known as profit attributable to shareholders.
Gross Income Versus Net Income
Gross income refers to an individual's total earnings or pre-tax earnings, and net income refers to the difference after deductions, credits and taxes are factored into gross income. To calculate taxable income, taxpayers subtract deductions and credits from gross income, and the Internal Revenue Service (IRS) bases income tax on this figure. The difference between taxable income and income tax is an individual's net income.
For example, imagine someone has $60,000 in gross income, and he qualifies for $10,000 in deductions. His taxable income is $50,000, and he has an effective tax rate of 15%, making his income tax payment $7,500 and his net income $42,500.
Net Income on Tax Returns
In the United States, individual taxpayers submit some version of Form 1040 to the IRS to report their annual earnings. This form does not have a line for net income. Instead, it has lines to record gross income, adjusted gross income (AGI) and taxable income.
After noting their gross income, taxpayers subtract certain income sources such as Social Security benefits and qualifying deductions such as student loan interest. The difference is their AGI. Taxpayers then subtract standard or itemized deductions from their AGI to determine their taxable income. As indicated above, the difference between taxable income and income tax is the individual's net income, but this number is not noted on individual tax forms.
Net Income on Paycheck Stubs
Most paycheck stubs have a line devoted to net income. This is the amount that appears on an employee's check. It consists of his gross income, minus taxes and retirement account contributions.
Calculating Net Income for Businesses
To calculate net income for a business, start with a company's total revenue. From this figure, subtract the businesses expenses and operating costs to calculate the business's earnings before tax. Deduct tax from this amount to find the business's net income.
Net income, like other accounting measures, is susceptible to manipulation through such things as aggressive revenue recognition or by hiding expenses. When basing an investment decision on net income numbers, review the quality of the numbers that were used to arrive at the business's taxable income as well as its net income.