What is net income (NI)?
Net income (NI), also called net profit, is calculated as sales less cost of goods sold, selling expenses, general and administrative expenses, operating expenses, depreciation, interest, taxes and other expenses. This is a useful figure for investors to assess how much revenue exceeds an organization’s expenses. This number appears on the income statement of a company and is also an indicator of the profitability of a company.
Key points to remember
Net income (NI) is calculated as income less expenses, interest and taxes.
- Earnings per share is calculated using NI.
- Investors should review the figures used to calculate the NI, as expenses may be hidden in accounting methods or income may be inflated.
- NI also represents the total income or the income before tax of an individual after taking into account deductions and taxes in the gross income.
Net income also refers to an individual’s income after taking into account taxes and deductions.
Calculation of net income
Understanding net income (NI)
Businesses use net income to calculate their earnings per share. Business analysts often refer to net income as net income because it is at the bottom of the income statement. Analysts in the UK know NI as a shareholder profit.
Net income (NI) is known as the “bottom line” because it appears as the last line in the income statement once all expenses, interest and taxes have been subtracted from income.
Calculate NI for Business
To calculate the net income of a business, start with the total income of a business. From this figure, subtract the business expenses and operating costs to calculate the business profit before tax. Deduct the tax from this amount to find the NI.
NI, like other accounting measures, is likely to be manipulated by elements such as aggressive revenue recognition or the masking of expenses. When basing an investment decision on NI, investors should review the quality of the figures used to arrive at taxable income and NI.
Personal gross income vs NI
Gross income refers to an individual’s total earnings or pre-tax earnings, and NI refers to the difference after taking into account deductions and taxes in gross income. To calculate taxable income, which is the figure used by the Internal Revenue Service to determine income tax, taxpayers subtract deductions from gross income. The difference between taxable income and income tax is the NI of an individual.
For example, an individual has gross income of $ 60,000 and is entitled to $ 10,000 in deductions. The taxable income of this person is $ 50,000 with an effective tax rate of 13.88% giving an income tax payment of $ 6,939.50 and an NI of $ 43,060.50.
NI on tax returns
In the United States, individual taxpayers submit a version of Form 1040 to the IRS to report their annual income. This form has no line for net income. Instead, it has lines for recording gross income, adjusted gross income, and taxable income.
After recording their gross income, taxpayers subtract certain sources of income such as social security benefits and allowable deductions such as interest on student loans. The difference is their adjusted gross income (AGI). Taxpayers then subtract standard or itemized deductions from their AGI to determine their taxable income. As indicated above, the difference between taxable income and income tax is the NI of the individual, but this number is not indicated on the individual tax forms.
NI on the pay stubs
Most pay stubs have a dedicated line for NI. This is the amount that appears on an employee’s check. The number is the employee’s gross income, less taxes and contributions to the retirement account.