I hope you are already aware that net income is the total amount you get the after-tax deduction. But it is vital to know what other things are included in the list. Before heading further, let’s talk about FICA. “FICA” is the acronym of the “Federal insurance contributions act,” specially designed for social security. We hope you are already aware of the pay stub concept. If you are calculating your personal or net business income, then both processes are a bit different. So, both methods involve a few math formulas. But the process is simple if you are aware of the basics. Thus, let’s discuss the basics of calculating net income.
How to calculate net income? A step-to-step process
Net income is the total profit or income that you get from the after-tax deduction. Unlike net income, gross income has a different concept. The gross income is the total amount before deducting expenses and taxes. In the most straightforward way, here is the formula that will help to calculate the net income.
“Net income = Gross income – expenses”
Or you can use the formula:
“Net income = income – cost of goods sold – expenses”
If your expenses are more than the revenue, then you are bearing the net loss. But along with this, it is vital to mention the basic formula of the gross income. So, the formula of the gross income is as under:
“Gross income = Revenue – the cost of goods sold.”
By using these formulas, you can find the net income for any period. For instance, if you want to calculate annually, quarterly and monthly.
Things you have to consider while calculation:
However, it’s also vital to know what things are included in expenses or the cost of goods sold. So, here are the following main things that fit in different sections of the net income.
|State federal or local income tax||Social security||Medicare taxes|
|Payroll taxes||Union dues||Health plan|
|Flexible savings account||Pension plans||Health saving account deductions|
Note: It is vital to note down that all deductions are mandatory. Moreover, the list may include other random things like life insurance or retirement plan deduction. Apart from this, the list can go long, and it depends upon your gross income.
How to calculate total net income?
While calculating the net income, it is vital to go through the old records. Thus, you have to do a little bit of math, and sometimes it is a daunting task.
Calculate gross annual income:
In the first step, we will calculate gross net income before going on the road of net income. Gross income is the salary that you get monthly. For instance, if you are taking a $12,000 stipend, then deducting any tax or other thing is your gross income. However, you can multiply the monthly income by 12 to find the annual income. But if you work for irregular hours, you have to add all hours to find real yearly gross income.
Subtract the deductions that you have:
After calculating gross annual income, the next step is to figure net earnings. However, for this, you have to subtract the deductions. After this step, you will end up getting total taxable income. For instance, if you have $55,000 gross income and deduct $5,000, then $50,000 is your taxable income.
Deduct the retirement contributions:
If you have an individual retirement arrangement, then some amount may be deducted from taxable income. But the total amount depends on your situation and personal condition. Thus, you can consult the IRS to discuss your retirement savings.
Subtract medical expenses:
After deducting retirement expenses, the next step is to subtract the medical and dental expenditures. Thus, it subtracts from the taxable income, and the amount varies from person to person. For instance, if you have a costly medical insurance plan, then more amounts will account for the medical or dental expenses. Apart from this, you will subtract the total owed amounts like federal, local, state, or other taxes. However, all of the deductions will appear on the pay stub in a separate section.
Taxes from annual income:
The last and most vital thing is to deduct the taxes from the income. However, in this case, the total amount that you owe in terms of taxes will be deducted. You add up all taxes, deductions and cut them from the total earnings. Here is the little depiction of net income calculation:
|Net income||$60,000-$20,000-$20,000 (EXPENSES) = $20,000 net income|
Note: It is vital to note a slightly different formula to calculate net business income. Like here, you have to add administrative costs in the expense section. Moreover, it is noteworthy to note here that there is a slightly different formula for calculating operating net income.
Founder Dinis Guarda
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