What Is Net Income (NI)?
Net income - NI is equal to net earnings (profit) calculated as sales less cost of goods sold, selling, general and administrative expenses, operating expenses, 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.
Net income also refers to an individual's income after taking taxes and deductions into account.
Calculating Net Income
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 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, review the quality of the numbers the company used to arrive at its taxable income and net income.
Personal Gross Income Versus NI
Gross income refers to an individual's total earnings or pre-tax earnings, and net income refers to the difference after factoring deductions and taxes into gross income. To calculate taxable income, which is what the Internal Revenue Service bases income tax on, taxpayers subtract deductions from gross income. 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 qualifies for $10,000 in deductions. His or her taxable income is $50,000, and he or she has an effective tax rate of 13.88%, making his or her income tax payment $6,939.50 and his or her net income $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, 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 stated 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.
NI 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 comprises the employee's gross income, minus taxes, and retirement account contributions.