How To Calculate Net Income

“Net Income “, have you read these two words in some books or articles about finances and you have not understood what it is? Perhaps you may have heard about the word when it is used together with its counterpart gross income? It’s not that complicated you can learn more about what it is and how to calculate net income, so keep on reading. Knowing how to calculate for net income is absolutely necessary, and you need it as basic knowledge for improving or working with your personal finances.
You need to know what net income is. Within the world of accounting and finance, there are a lot of terms that sooner or later you need to know with a certain domain.

This, for several reasons:

1. They are more than numbers that understanding, can help you make decisions.

2. You will have an accountant with whom it is better to understand and not have difficulty understanding what they are saying.

3. A healthy and growing business has tax obligations that are best fulfilled but want to get into trouble with the tax authorities.

So you need to listen as we will explain everything about how to calculate for net income in an easy to understand way.

Gross vs Net Income

Simply put gross income is all of the sources of income added up, while net income is the total income minus all of the expenses that have been incurred, such as operating costs or personal taxes. The gross income is also known as the sum of all sources of income, salary and non-salary.

For example when calculating for income, someone may think of salaries. The salaries are the remunerations that the worker receives for his services. Salary payments always include a base salary corresponding to the professional category that is performed, to which more income can be added for various concepts:

For example, to calculate the gross income of a salaried person, this would have to be taken into account.

  • Base salary
  • Added amounts salaries
  • Seniority in the company
  • Awards, bonuses or improvements
  • Extra prorated payments (when we are paid 12 pays instead of 14 per year, each month we receive a part of the 2 extraordinary payments).
  • The non-wage sources of incomes, and in general the compensations of the expenses that have been had to work.

There are many numerous factors for calculating The sum of the salary and non-salary perceptions of your first payroll certainly seems high, right? So why in the bank have I received much less money?

To reach the net income, deductions for Social Security contributions (for common contingencies, unemployment, training, etc.) and withholding that the company is obliged to make on the payroll for the Treasury are legally applied to the gross income. The contribution to Social Security is composed of both the worker’s share and the employer’s contribution.

The first appears on the payroll, and is the one that is borne by the worker, and for that reason the employer makes this deduction of salary. The employer fee is not included in the payroll, but it is a cost that the company has to assume for each worker it has, so the disbursement made by the company for each worker is higher than the one that appears on the payroll. (That is, you pay the company a lot more than what it pays you).

The withholding of the Personal Income Tax is a payment on account that is advanced with respect to the declaration of our income for the following year. The company is obligated by the Treasury to withhold a money and deposit it in advance to the Treasury.

Calculating For Net Income:

When it comes to calculating for net income, usually for companies they would count various factors such as their operating costs. Net income considers variable costs, but also other costs and expenses of the business, known as fixed costs. An example is the salary of the employees, since regardless of the quantity of production, they have fixed remuneration.

With all the costs and expenses considered now, we have the total costs of the business. For net profit, the calculation can be done by the formula:

Net Income = Total Revenues – Total Costs

Still considering the company from the previous example, we now consider the same variable revenues and costs and add costs that are fixed for the company, such as fixed wages and taxes:

Total revenue: $ 2,500,000.00

Variable costs:  $ 700,000

Salaries: $ 280,000.00

Fixed taxes:  $ 80,000

Adding the total costs we have the value of $ 1,060,000 ( $ 700,000 +  $ 280,000.00 +  $ 80,000.00) , and with this, the net profit of this company, which is  $ 1,440,000, 00 ( $ 2,500,000.00 –  $ 1,060,000.00).

In economics, a profit is obtained when a person performs an activity that seeks to obtain benefits, but that there are costs in doing so. This difference in benefits and costs, when positive, is known as profit.
In a business the same happens because there are costs with employees, suppliers and taxes, for example, while the benefits happen mainly by sales of their products, known as revenues.

In a simple way, profit is calculated by subtracting revenue from costs, also known as “period profit”:

Profit of a business = Revenues – Costs and Expenses

The revenue is obtained by multiplying: Sales price x Quantities sold .
If the result is negative, the business has no profit, but a loss. There is still a value of when revenues and costs are exactly the same, and there are no profits or losses, known as Break-even Point .

In addition, the result of the period can be calculated in order to obtain the “gross income” or the “net income”.

Hopefully, this article has taught you what you needed to know about net income. The two examples given here covered both calculating net income for salaries and businesses. So you should be able to use that knowledge to practically calculate how much your company, or yourself is actually earning in a given period of time.

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