Profitability
How to Calculate Net Income: Formula, Example, and Free Calculator
Net income is the bottom line — what's left after every expense has been paid. It's the most important number on your income statement, but getting there requires understanding every layer of cost between revenue and profit.
What Is Net Income?
Net income (also called net profit, net earnings, or the bottom line) is the total profit remaining after subtracting all business expenses — including COGS, operating expenses, interest, and taxes — from total revenue. In accrual accounting, net income follows the structure of a multi-step income statement:
| Line Item | Calculation | Amount |
|---|---|---|
| Revenue | Total sales | $250,000 |
| − COGS | Cost of goods sold | ($100,000) |
| = Gross Profit | Revenue − COGS | $150,000 |
| − Operating Expenses | Rent, salaries, marketing, insurance | ($95,000) |
| = Operating Profit | Gross profit − operating expenses | $55,000 |
| − Interest & Taxes | Loan interest, income tax | ($15,000) |
| = Net Income | Revenue − all expenses | $40,000 |
Example: A consulting firm with $250K revenue, $100K direct costs, $95K overhead, $15K interest and taxes. Net profit margin = $40,000 ÷ $250,000 = 16%.
Step-by-Step Calculation
Step 1: Start with total revenue
Add up all income from sales, services, and other operating activities for the period. Do not include one-time gains (asset sales) or investment income — those go below the operating line.
Step 2: Subtract COGS to get gross profit
COGS includes materials, direct labor, and shipping costs directly tied to producing your product or service. The result is gross profit. See our gross profit guide for details, or use our COGS calculator.
Step 3: Subtract operating expenses to get operating profit
Operating expenses (SG&A) include rent, salaries, marketing, insurance, software, and administrative costs. These are not directly tied to production. The result is operating profit (or EBIT — earnings before interest and taxes). Use our profit margin calculator to model this for your own numbers.
Step 4: Subtract interest and taxes to get net income
Interest expense on loans and income tax are subtracted last. The IRS taxes your net income (with adjustments for deductions and credits). Use our 1099 tax calculator to estimate your tax liability.
Types of Profit: A Comparison
| Metric | Formula | What It Shows |
|---|---|---|
| Gross Profit | Revenue − COGS | Product or service pricing efficiency |
| Operating Profit | Gross Profit − OpEx | Core business profitability |
| Net Income | Operating Profit − Interest & Tax | Total profitability after all costs |
| EBITDA | Net Income + Interest + Tax + Depreciation + Amortization | Cash earnings before financing and accounting adjustments |
For a deeper look, see our guide on EBITDA explained and gross margin vs net margin.
Why Net Income Matters
Business valuation
Net income is the starting point for most business valuation methods. A business with consistent net income is worth 2-5x annual earnings. Use our business valuation calculator to estimate your company's value.
Lending decisions
Lenders look at net income to assess debt service coverage. A profitable business is more likely to qualify for loans. Our business loan calculator helps you understand borrowing capacity.
Growth planning
Reinvested net income funds expansion without taking on debt. Track how much you can reinvest using our target profit calculator and cash flow forecast.
Calculate Your Net Income
Use these free tools to calculate your actual net income and understand your profitability:
Frequently asked questions
What is the difference between net income and gross profit?+
Gross profit is revenue minus only the cost of goods sold (COGS). Net income subtracts all expenses — COGS, operating expenses (rent, salaries, marketing, insurance), interest, and taxes. A business can have healthy gross profit but negative net income if operating expenses are too high. Both numbers are important but they answer different questions: gross profit tells you if your product pricing works; net income tells you if your entire business is profitable.
Can net income be positive while cash flow is negative?+
Yes, and this is a common trap for growing businesses. Net income is an accrual accounting concept — it includes revenue you've earned but haven't collected yet (accounts receivable) and expenses you've incurred but haven't paid yet (accounts payable). A business can show a profit on paper while struggling to pay bills because customers haven't paid their invoices. This is why both a P&L statement and a cash flow statement are essential.
Is net income the same as profit?+
In everyday language, yes — net income is often called the bottom line or net profit. But there are multiple types of profit: gross profit (revenue − COGS), operating profit (gross profit − operating expenses), and net profit (operating profit − interest − taxes). When someone says 'profit' without specifying, they usually mean net income, but it's more precise to name the specific metric.
How does net income affect my taxes?+
Net income (specifically taxable income, which may differ from accounting net income) is the base on which you pay income tax. Higher net income means higher taxes. However, tax law allows certain deductions and credits that can reduce taxable income below accounting net income — such as Section 179 depreciation, QBI deduction, and retirement contributions. See our small business tax deductions guide and QBI deduction calculator for details.
What is a good net profit margin?+
A good net profit margin varies widely by industry. Service businesses typically aim for 15-25%. Retail averages 5-10%. Restaurants often run 5-15%. Construction firms average 5-10%. Software companies can achieve 20-30% at scale. The most important benchmark is your own trend — is your net margin improving or declining over time? See our profit margin by industry guide for detailed benchmarks.