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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.
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.
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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.