Net Income (NI) Definition: Uses, and How to Calculate

It
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Corporate Finance

Financial Statements

By
Will Kenton
Updated May 20, 2022

Reviewed by
Margaret James
Fact checked by
Kirsten Rohrs Schmitt

Investopedia / Laura Porter

What Is Net Income (NI)?

Net income (NI), also called net earnings, is calculated as sales minus cost of goods sold,
selling, general and administrative expenses, operating expenses, depreciation, interest,
taxes, and other expenses. It is a useful number for investors to assess how much revenue
exceeds the expenses of an organization. This number appears on a company's income
statement and is also an indicator of a company's profitability.1

Key Takeaways

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 Net income (NI) is calculated as revenues minus expenses, interest, and taxes.
Earnings per share are calculated using NI.
Investors should review the numbers used to calculate NI because expenses can be
hidden in accounting methods, or revenues can be inflated.
NI also represents an individual's total earnings or pre-tax earnings after
factoring deductions and taxes in gross income.

Net income also refers to an individual's income after taking taxes and deductions into
account.

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Calculating Net Income

Understanding Net Income (NI)

Businesses use net income to calculate their earnings per share. Business analysts often
refer to net income as the bottom line since it is at the bottom of the income statement.
Analysts in the United Kingdom know NI as profit attributable to shareholders.

Net income (NI) is known as the "bottom line" as it appears as the last line on the income
statement once all expenses, interest, and taxes have been subtracted from revenues.

Calculating NI for Businesses

To calculate net income for a business, start with a company's total revenue. From this
figure, subtract the business's expenses and operating costs to calculate the business's
earnings before tax. Deduct tax from this amount to find the NI.

NI, like other accounting measures, is susceptible to manipulation through such things as
aggressive revenue recognition or hiding expenses. When basing an investment decision
on NI, investors should review the quality of the numbers used to arrive at the taxable
income and NI.

Personal Gross Income vs. NI

Gross income refers to an individual's total earnings or pre-tax earnings, and NI refers to
the difference after factoring deductions and taxes into gross income. To calculate taxable
income, which is the figure used by the Internal Revenue Service to determine income tax,
taxpayers subtract deductions from gross income. The difference between taxable income
and income tax is an individual's NI.2

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For example, an individual has $60,000 in gross income and qualifies for $10,000 in
deductions. That individual's taxable income is $50,000 with an effective tax rate of
13.88% giving an income tax payment $6,939.50 and NI of $43,060.50.

NI on Tax Returns
In the United States, individual taxpayers submit a version of Form 1040 to the IRS to
report annual earnings. This form does not have a line for net income. Instead, it has lines
to record gross income, adjusted gross income (AGI), and taxable income.3

After noting their gross income, taxpayers subtract certain income sources such as Social
Security benefits and qualifying deductions such as student loan interest. The difference is
their AGI. Although the terms are sometimes used interchangeably, net income and AGI
are two different things. Taxpayers then subtract standard or itemized deductions from
their AGI to determine their taxable income. As stated above, the difference between
taxable income and income tax is the individual's NI, but this number is not noted on
individual tax forms.

NI on Paycheck Stubs
Most paycheck stubs have a line devoted to NI. This is the amount that appears on an
employee's check. The number is the employee's gross income, minus taxes, and
retirement account contributions.

Article Sources

Related Terms

Taxable Income: What It Is, What Counts, and How To Calculate

Taxable income is the portion of your gross income used to calculate how much tax you
owe in a given tax year.

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Net of Tax: Definition, Benefits of Analysis, and How to Calculate
Net of tax is an accounting figure that has been adjusted for the effects of taxes.

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What Is Adjusted Gross Income (AGI)?
Adjusted gross income (AGI) is your gross income minus certain adjustments. The IRS
uses the AGI to determine how much income tax you owe.

more
Federal Income Tax
Learn about U.S. federal income tax brackets and find out which tax bracket you're in.
Here, we explain marginal tax rates, state taxes, and federal taxes.

more

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Operating Income
Operating income is a company's profit after deducting operating expenses such as wages,
depreciation, and cost of goods sold.

more
Modified Adjusted Gross Income (MAGI): Calculating and Using It
The modified adjusted gross income (MAGI) you report on your tax return is used to
determine if you qualify for certain tax benefits.

more

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