Income
Net Income: Definition & Example
Also called: Take-home pay
What Is Net Income?
Net income is what remains after deductions. For a person, it is take-home pay after taxes and withholdings. For a business, it is profit after all expenses.
What does net income mean?
For an individual, net income is gross pay minus federal and state income tax, Social Security and Medicare taxes, and any pre-tax or post-tax deductions such as retirement contributions, health insurance, or wage garnishments. It is the amount that lands in the bank account.
For a business or self-employed person, net income is revenue minus the cost of goods sold, operating expenses, interest, and taxes. On a Schedule C, net profit is the figure lenders and landlords typically use as self-employment income.
Because bank deposits reflect net pay, deposit-based income estimates line up with net income. That is often useful because net income is what a household actually has available for rent and bills.
Net income example
An employee’s biweekly pay stub shows $2,400 gross, $264 federal tax, $96 state tax, $184 Social Security and Medicare, $120 for a 401(k), and $86 for health insurance. His net pay is $1,650, and that is the direct deposit his bank shows every other Friday.
Related terms
- Gross Monthly IncomeGross monthly income is the total amount a person earns in a month before taxes, retirement contributions, insurance premiums, or other deductions are taken out.
- Disposable IncomeDisposable income is the money a person has available to spend or save after income taxes are paid. It is sometimes confused with discretionary income, which is what remains after necessities too.
- Pay StubA pay stub is a document that accompanies a paycheck and itemizes the employee’s gross pay, taxes, deductions, and net pay for the pay period and year to date.
- Direct DepositDirect deposit is an electronic payment sent straight into a recipient’s bank account, most commonly used for paychecks, government benefits, and tax refunds.
- Residual IncomeResidual income is the money left over each month after paying major obligations such as housing, debt payments, taxes, and basic living costs. The term also refers to passive income that keeps arriving after the initial work.
Net income FAQ
- What is the difference between gross and net income?
- Gross income is earnings before deductions. Net income is what is left after taxes and other deductions, which is what an employee actually receives.
