## What is net income?

Net income — also referred to as net profit, net earnings or the bottom line — is the amount an individual earns after subtracting taxes and other deductions from gross income. For a business, net income is the amount of revenue left after subtracting all expenses, taxes and costs.

## Deeper definition

Net income is the total amount a person earns in a given period from all taxable wages, tips, and investment income like dividends and interest. This amount is calculated after subtracting income taxes; Social Security taxes, including Medicare and Medicaid, also known as the Federal Insurance Contributions Act (FICA) tax; health insurance payments; contributions to a retirement account, such as a 401(k); and any legal obligations, such as wage garnishments, loan payments, or child support.

For an individual, net income is calculated using the following equation:

Total Amount Earned (Gross Income) – Paycheck Deductions = Net Income.

For a business, net income equals is the amount remaining after subtracting all costs and expenses from revenue. Publicly traded companies use net income to help calculate their earnings per share (EPS). In business, net income is also referred to as the bottom line, as it appears as the final item in the income statement.

The business’s net income is used by investors and shareholders when they determine the health of their investment as well as banks when determining a business’s eligibility for a loan. Low or even negative net income results in a big drop in the value of the company’s shares.

Is your net income keeping you from paying off your credit cards? A balance-transfer credit card might help you get it under control.

## Net income example

Jason is an employee at BusinessCorp. His employment contract specifies that he’s to be paid \$40,000 per year, divided up over 24 paychecks. Federal and state income taxes, combined with the FICA tax, amount to exactly \$350 per paycheck. He also pays a \$40 health insurance premium out of each paycheck. His gross income is \$1,666.67, so to find his net income, Jason subtracts the \$350 and the \$40 from that amount, arriving at \$1,276.67 net income per paycheck, or \$30,640 per year.

## Other Personal Finance Terms

##### Experian

Experian is one of the three major credit bureaus. Bankrate explains

##### Aftercare

Aftercare is care you receive after medical treatment. Bankrate explains.

##### Disbursement

Disbursement is a financial and accounting term. Bankrate explains what it means.

##### Money laundering

Money laundering is a criminal activity. Bankrate explains how it works.

• ## Get the holiday gifts you want without breaking the bank

Personal Finance
• ## This Giving Tuesday, many Americans plan to give back

Personal Finance
• ## The straight story about ‘hard’ credit checks

Personal Finance
• ## Should I buy heath care or pay the Obamacare tax?

Personal Finance