Net Income (NI) Definition: Uses, and How to Calculate It

What Is Net Income (NI)?

Net income (NI), also called net earnings, is calculated as sales minus cost of goods sold, selling, general and administrative expenses, operating expenses, depreciation, interest, taxes, and other expenses. It is a useful number for investors to assess how much revenue exceeds the expenses of an organization. This number appears on a company's income statement and is also an indicator of a company's profitability.

Net income also refers to an individual's income after taking taxes and deductions into account.

Understanding Net Income (NI)

Businesses use net income to calculate their earnings per share. Business analysts often refer to net income as the bottom line since it is at the bottom of the income statement. Analysts in the United Kingdom know NI as profit attributable to shareholders.

Calculating NI for Businesses

To calculate net income for a business, start with a company's total revenue. From this figure, subtract the business's expenses and operating costs to calculate the business's earnings before tax. Deduct tax from this amount to find the NI.

NI, like other accounting measures, is susceptible to manipulation through such things as aggressive revenue recognition or hiding expenses. When basing an investment decision on NI, investors should review the quality of the numbers used to arrive at the taxable income and NI.

Personal Gross Income vs. NI

Gross income refers to an individual's total earnings or pre-tax earnings, and NI refers to the difference after factoring deductions and taxes into gross income. To calculate taxable income, which is the figure used by the Internal Revenue Service to determine income tax, taxpayers subtract deductions from gross income. The difference between taxable income and income tax is an individual's NI.

For example, an individual has $60,000 in gross income and qualifies for $10,000 in deductions. That individual's taxable income is $50,000 with an effective tax rate of 13.88% giving an income tax payment $6,939.50 and NI of $43,060.50.

NI on Tax Returns

In the United States, individual taxpayers submit a version of Form 1040 to the IRS to report 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. Although the terms are sometimes used interchangeably, net income and AGI are two different things. Taxpayers then subtract standard or itemized deductions from their AGI to determine their taxable income. As stated above, the difference between taxable income and income tax is the individual's NI, but this number is not noted on individual tax forms.

NI on Paycheck Stubs

Most paycheck stubs have a line devoted to NI. This is the amount that appears on an employee's check. The number is the employee's gross income, minus taxes, and retirement account contributions.