Yes, net income is after taxes. Because net income is your take-home pay. It is calculated by subtracting taxes and other deductions like insurance, and retirement contributions from your paycheck.
If you are a young adult or a new business owner then you must be hearing net income a lot. But what is it? Is net income after taxes?
Well, you are in luck. Because in this post I am going to answer is net income before or after taxes. Moreover, I’ll also cover topics such as what net income is, How to calculate it, gross income, and many more related topics. So, stay with me till the end.
What Is Net Income?
Net income refers to the exact amount you make after deducting things such as insurance, retirement pay, etc from your paycheck.
Though the net income refers to a number of things depending on the topic. However, in personal finance, it is the remaining amount after subtracting all the deductions and allowances from your paycheck.
In simpler terms, net income is your take-home pay or the actual amount of money you make. It is slightly different for businesses and self-employed persons.
Because for businesses and organizations net income is the sum after deducting the operating expenses such as cost of goods, wages, rent, and federal or state taxes. It is also called net earnings or net profit. So, is net income before or after taxes?
Is Net Income After Taxes?
Yes, net income is after taxes. Because your employer cuts the taxes, insurance, retirement pay and other things from your paycheck.
If you work for an organization then, your net income is the amount you receive from your employer. Because like most Americans you are probably a W2 employee.
Meaning, your employer automatically cuts income taxes and other deductible expenses like insurance, and retirement contributions from your paycheck. As a result, the amount you receive is your net income or after-tax income.
On the other hand, for a business owner or self-employed person, tax is considered to be one of the operating expenses. As a result, tax is subtracted from the total revenue along with other costs. Then a business owner gets the net earnings or net profit.
Either way, net income is always after taxes. Now that we know what is income after taxes called. So, let’s have a look at how to calculate net income after taxes.
How To Calculate Net Income After Taxes
Calculating net income is a fairly straightforward process. You just need to subtract taxes, retirement pay, insurance, and other deductions from your paycheck.
Follow the below steps for calculating your net income
- First, find out your salary amount.
- Then add your all your taxable income such as overtime payment, side hustle, or passive income (if any) to your salary. You will find out your total income.
- After that, find out your income tax, state taxes, property tax, and other taxes amount and add them.
- Afterward add your health insurance premiums, retirement savings, and other costs to the tax amount.
- Lastly, subtract all these deductions from your gross income.
Calculating net income for business owners and self-employed is almost the same. However, if you are a business owner or entrepreneur, then you just need to look at your income statement and subtract expenses from total revenue.
By this, you will get your net profit or gross profit.
Net Income Formula
Here is the simple formula to calculate net profit
For your convenience, I am also providing a simple calculator for you to find net income.
Net Income Calculator
In the first box, simply add your pre-tax income. Then in the below boxes add total insurance payments, retirement contributions, and other costs respectively and you will get your net income in the last box.
This second form is for businesses. To find out your gross profit look at your balance sheet for a given period and find out revenue and operating costs. add the revenue in the first box. Then respectively add federal taxes and state taxes and operating costs.
Is Net Income the Same as After Tax Income?
Yes, net income is the same as after-tax income.
If you are a W2 employee, then your employer automatically cuts off the tax amount from your payroll. So, your income becomes after tax or after income tax income.
On the other hand, if you are a self-employed person then you have to calculate your net income after substracting income Tax. So, your net income becomes after-tax income.
What is Gross Income?
Gross income is the total sum of money you or your business has earned for a certain period of time before any deductions are made.
For individuals, gross income is pre-tax money. Meaning the money you have earned in wages, commissions, bonuses, and tips before your employer has deducted taxes and other deductibles.
On the other hand, for businesses, gross income is the total revenue for a certain period of time. In simpler words in is the income before calculating your net profit. Moreover, gross income also includes any income from investment income, rentals, or royalties.
Gross income is used to calculate a person’s or company’s total taxable income.
Is Gross Income After Taxes?
No, gross income is not after taxes. Because gross income is pre-tax income for an individual or a company.
Your gross income is not the same as your net income. Because your gross income is slightly more than your net income. As gross income is calculated before subtracting any deductions or operating costs. So, gross income is not after tax.
Why Is It Important To Understand Net Income?
There is a slight misconception about your income. Because your earnings are not just how much money you make. But how much of that money you get to keep from it. After all, your take-home pay is what you actually have to live on.
By definition net income is similar to your take-home pay. So, when you try to build a budget or spending you must keep in mind that your gross income is not your total income. It will help you spend less and plan better.
On the other hand for businesses, a negative net income means your business is operating at a loss. So, you must take steps to improve your company’s net income. As a result, understanding net income is crucial for both individual and organizational levels.
In Summary
Net income is your after-tax income whereas gross income is pre-tax income. Understanding this simple concept is important. Because it does not only help you to determine your taxes. But also help you to budget and make your business more efficient.
Lastly, if you are facing any issues with your business net income and taxes, it’s suggested to talk with a tax professional.
