Gross income is the total amount you earn typically over the course of a year before expenses. To calculate your annual gross income , add up your total client billings for the past year. Gross income is a helpful way to look at the revenue potential of your business and to assess how you are doing year over year.
By looking at your various revenue streams, you can see which clients and which types of projects bring in the most income and the least income. This insight may influence where you choose to direct the majority of your time and effort, or determine the future goals you set for your business. Net income is the profit your business earns after expenses and allowable deductions.
To calculate net income, take your gross income and subtract all of your business expenses—marketing or advertising costs, travel or office expenses, tax payments, etc.
Below we have used our bill rate calculator to calculate an example of typical business expenses so that net income can be determined. After you determine your expenses, you can calculate your net income vs gross income. Net income can help you understand the health of your business. For instance, if your gross income is significantly higher than your net income year after year, you may want to evaluate your expenses line-by-line to see what you can eliminate or reevaluate.
Gross profit helps investors to determine how much profit a company earns from the production and sale of its goods and services. Gross profit is sometimes referred to as gross income. On the other hand, net income is the profit that remains after all expenses and costs have been subtracted from revenue.
Net income or net profit helps investors determine a company's overall profitability, which reflects on how effectively a company has been managed. Understanding the differences between gross profit vs. Gross profit, operating profit, and net income refer to the earnings that a company generates.
However, each one represents profit at different phases of the production and earnings process. Gross profit is a company's profits earned after subtracting the costs of producing and selling its products—called the cost of goods sold COGS. Gross profit provides insight into how efficient a company is at managing its production costs, such as labor and supplies, to produce income from the sale of its goods and services. The gross profit for a company is calculated by subtracting the cost of goods sold for the accounting period from its total revenue.
Revenue is the total amount of money 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. For example, companies in the retail industry often report net sales as their revenue figure. The merchandise that has been returned by their customers is subtracted from total revenue.
Revenue is often referred to as the "top line" number since it is situated at the top of the income statement. Cost of goods sold refers to the direct costs involved in producing a company's goods.
COGS typically includes the following:. We can see from the COGS items listed above that gross profit mainly includes variable costs —or the costs that fluctuate depending on production output.
Typically, gross profit doesn't include fixed costs , which are the costs incurred regardless of the production output. For example, fixed costs might include salaries for the corporate office, rent, and insurance. However, some companies might assign a portion of their fixed costs used in production and report it based on each unit produced—called absorption costing.
Gross profit is calculated by subtracting revenue or net sales from a company's cost of goods sold as shown below:. Both gross profit and net income are found on the income statement.
Gross profit is located in the upper portion beneath revenue and cost of goods sold. Net income is found at the bottom of the income statement since it's the result of all expenses and costs being subtracted from revenue. Net income is synonymous with a company's profit for the accounting period. In other words, net income includes all of the costs and expenses that a company incurred, which are subtracted from revenue. Net income is often referred to as the bottom line due to its positioning at the bottom of the income statement.
Although many items can be listed on a company's income statement, depending on the company's industry, usually net income is derived by subtracting the following expenses from revenue:. Additional income sources are also included in net income. For example, companies often invest their cash in short-term investments, which is considered a form of income. Also, proceeds from the sale of assets are considered income. As stated earlier, net income is the result of subtracting all expenses and costs from revenue, while also adding income from other sources.
Depending on the industry, a company could have multiple sources of income besides revenue and various types of expenses. Some of those income sources or costs could be listed as separate line items on the income statement. For example, a company in the manufacturing industry would likely have COGS listed, while a company in the service industry would not have COGS but instead, their costs might be listed under operating expenses.
The general formula for net income could be expressed as:. A more detailed formula could be expressed as:. Investors often hear the phrase: "A company posted top-line or bottom-line growth. Bottom line growth refers to a growth in net income since net income is listed on the bottom line of the income statement. Her salary is her gross income. Essentially, net income is your gross income minus taxes and other paycheck deductions. To calculate it, begin with your gross income or the amount you earn from all taxable wages, tips and any income you make from investments, like interest and dividends.
Then subtract income taxes, insurance payments, contributions to retirement accounts, Social Security and Medicare taxes, as well as any legal obligations such as loan payments, child support or wage garnishments.
Net income can give you a more realistic idea of how much you can afford to spend, and is a good indicator of how much you will end up paying in taxes each year.
However, your gross income is not the same as your taxable income. Common examples include life insurance payouts, certain Social Security benefits, state or municipal bond interest and some inheritances or gifts.
Instead, your taxable income is known as your adjusted gross income AGI. Depending on your financial situation, one of the two options will reduce your taxable income more than the other. You have to comply with a number of laws, such as having a payroll register, issuing the right pay stubs, and keeping your payroll records for at least three years. How can you stay on top of payroll laws and practical aspects?
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