Net Income (NI): Definition, Calculation, and Why It Matters

Key takeaways

• Net income (NI), also called net earnings, is the amount remaining after all expenses, interest, taxes, and deductions are subtracted from total revenue (for businesses) or gross pay (for individuals).
• For companies, NI appears as the “bottom line” on the income statement and is used to calculate metrics such as earnings per share (EPS).
• For individuals, NI is take‑home pay after taxes and payroll deductions.
• Net income can be distorted by accounting choices; investors should review underlying items and disclosures.

What is net income?

• For a business: net income equals total revenue minus cost of goods sold, operating expenses, interest, taxes, and any other expenses. It measures overall profitability for a reporting period.
• For an individual: net income (net pay) is gross earnings minus taxes and payroll deductions (e.g., retirement plan contributions, health savings accounts).

How to calculate net income

Business (basic steps):
1. Start with total revenue.
2. Subtract cost of goods sold to get gross profit.
3. Subtract operating expenses (selling, general, administrative) to get operating income.
4. Add/subtract non‑operating items (interest, other income/expenses).
5. Subtract taxes to arrive at net income.

Simple formula:
Net income = Total revenue − All expenses (COGS, operating expenses, interest, taxes, etc.)

Individual example:
– Gross income: $60,000
– Deductions: $10,000 → Taxable income = $50,000
– If taxes = 13.88% of taxable income → Taxes = $6,939.50
– Net income = $50,000 − $6,939.50 = $43,060.50 (take‑home after taxes; additional payroll deductions would further reduce this)

Net income vs. gross income vs. AGI

• Gross income: total earnings before any deductions or taxes.
• Adjusted Gross Income (AGI): gross income after certain allowable adjustments (specific to U.S. tax rules); used to determine taxable income.
• Net income: the final amount after subtracting deductions, taxes, and other expenses. AGI is a step in the tax calculation; NI is the residual after taxes and other final deductions.

Where net income appears

• Company financials: Net income is the last line on the income statement and is used to compute EPS and retained earnings.
• Individual tax forms: Forms like the U.S. Form 1040 report gross income, AGI, and taxable income, but do not explicitly report an individual “net income” figure; pay stubs typically display net pay.

Why investors and managers should care

• Net income indicates profitability and is central to valuation metrics and performance assessments.
• It can be affected by one‑time items, accounting policies (revenue recognition, capitalization), and tax strategies. Always review notes and reconcile to cash flows to assess quality.

Frequently asked questions

Q: Is net income before or after taxes?
A: After taxes. Net income is the amount remaining once taxes and all other expenses are deducted.

Q: Where is net income reported?
A: On a company’s income statement (the bottom line). For employees, net pay appears on paycheck stubs.

Q: How does net income affect earnings per share (EPS)?
A: EPS = (Net income − Preferred dividends) ÷ Weighted average common shares outstanding. Higher net income generally raises EPS, all else equal.

Bottom line

Net income is the definitive profitability measure for a reporting period. For businesses, it’s the last line on the income statement and a key input for valuation and performance analysis. For individuals, it represents take‑home pay after taxes and deductions. Always evaluate the components and quality of net income, because accounting choices and unusual items can make it less representative of recurring economic performance.