How do I Calculate Net Income?
You can calculate net income simply by adding up income from all sources and expenses from all sources, and subtracting expenses from income. Remember, that income should include not only salary and payments, but any bonuses, child support gifts, and other income which may or may not be taxable. Expenses should include things like bills and taxes, which some may overlook because they could be deducted automatically. Net income is different than gross income or taxable income.
The first step to determining net income is to figure how much gross income came in for a certain period of time, usually annually. If you are figuring these numbers for tax purposes, and are married, you may need to consider your spouse's income as well. Generally, if you are employed, your annual income to date will normally be on your check statement. If you are self employed, you will likely have to tally receipts and statements from many different sources.
Once that number is added up, the next step is to consider expenses. Common household expenses include debt payments, utility payments, insurance, food and clothing, but are not limited to just those things. Business expenses also include insurance, debt, and utility payments, but there may be other things such as payroll expenses. Many do not keep track of expenses as well as income, so coming up with an exact net income is sometimes problematic. Also, remember to include any tax payments made during the year.
After all these numbers are added up, the next step is to subtract. Always subtract the expenses from gross income even if you end up with a negative number. It could be that your net income is a negative number, if you have experienced a loss that year. This happens only when expenses exceed gross income. If this is the case, then you may need to make some major adjustments to bring these numbers back into balance or produce a profit.
If you are owed money, or money is expected to come in after the time frame being considered, do not add it. For example, if you are owed money from the previous year that has not come in yet, it should not be included in your income calculation. Rather, add it to the next year's income after you have verified that it is received. Likewise, the same is true of expected expenses. This gives you an accurate picture of what the net income was for the period of time in question, understanding that future payments will influence next year's numbers.
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