Net Income (NI): Definition, Uses, and Formula

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What Is Net Income (NI)?

Net income (NI), also called net earnings, is a useful number for investors to assess how much revenue exceeds the expenses of an organization. The formula to determine net income is sales minus cost of goods sold, selling, general and administrative expenses, operating expenses, depreciation, interest, taxes, and other expenses.

Net income appears on a company’s income statement and is an indicator of a company’s profitability. Net income also refers to an individual’s income after taking taxes and deductions into account.

Key Takeaways

• Net income (NI) is calculated as revenue minus expenses, interest, and taxes.
• Earnings per share (EPS) are calculated using NI.
• Investors should review the numbers used to calculate NI because expenses can be hidden in accounting methods, or revenues can be inflated.
• NI also represents an individual’s total earnings or pretax earnings after factoring deductions and taxes in gross income.

Understanding Net Income (NI)

Businesses use net income to calculate their earnings per share (EPS). 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.

Net income (NI) is known as the bottom line, as it appears as the last line on the income statement once all expenses, interest, and taxes have been subtracted from revenues.

Calculating Net Income 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.

Net income, 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 to ensure that they are accurate and not misleading.

Personal Gross Income vs. Net Income

Gross income refers to an individual’s total earnings or pretax 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 (IRS) 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 of $6,939.50 and NI of $43,060.50.

Net Income 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.

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 any contributions to accounts such as a 401(k) or Health Savings Account (HSA).

What Is the Difference Between Net Income and Gross Income?

Gross income is the total amount earned. Net income is gross income minus expenses, interest, and taxes. Net income reflects the actual profit of a business or individual.

Is Net Income Before Taxes or After?

Net income is what a business or individual makes after taxes, deductions, and other expenses are taken out. In business, net income is what a company has left after all expenses are subtracted, including taxes, wages, and the cost of goods.

What Is a Company’s Income Statement?

An income statement is one of the three key documents used for reporting a company’s yearly financial performance. The income statement includes the gains, losses, revenue, and expenses that a company reports in that period. Net income is the bottom line on an income statement.

The Bottom Line

Net income, or net earnings, is the bottom line on a company’s income statement. It’s calculated by subtracting expenses, interest, and taxes from total revenues. Net income can also refer to an individual’s pretax earnings after subtracting deductions and taxes from gross income.

Earnings per share (EPS) are calculated using a business’s net income. These numbers should always be reviewed by investors to ensure that they are accurate and not inflated or misleading.

1. Internal Revenue Service. “What Is Taxable and Nontaxable Income?”
2. Internal Revenue Service. “Form 1040: U.S. Individual Income Tax Return.”

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Revenue is the income generated from normal business operations. Revenue can also be earned by governments and nonprofits.

Diluted EPS is a performance metric used to assess a company's earnings per share if all convertible securities were exercised.

Mark to market (MTM) is a method of measuring the fair value of accounts that can fluctuate over time, such as assets and liabilities.

An income statement is one of the three major financial statements that businesses issue. Learn how it is used to track revenue, expenses, gains, and losses.

Accrual accounting is where a business records revenue or expenses when a transaction occurs using the double-entry accounting method.

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