Gross vs Net Income: Differences and How to Calculate

By MBO Partners | June 10, 2020

Share
What is Gross vs Net Income Differences and How to Calculate

Gross income is the total amount you earn and net income is your actual business profit after expenses and allowable deductions are taken out. However, because gross income is used to calculate net income, these terms are easy to confuse.

When you run your own business, understanding the difference between gross income and net income is important both to evaluate your financial status on a personal level as well as to assess how your business is doing. These numbers can also have a big impact on how you pay taxes. Understand how gross income and net income are defined in order to understand their key differences.

What is gross income?

Gross income is the total amount you earn (typically over the course of a year) before expenses. Think of it as the profit you’ve made from the services you provide—the sum of all your client billings before any deductions, taxes, or withholding.

How to calculate gross income

To calculate your annual gross income, add up your total client billings for the past year. For example, if your client billings add up to $90,000 in revenue, that number is your annual gross income or total gross wages.

Why is gross income important?

Gross income is a helpful way to look at the revenue potential of your business and to assess how you are doing year over year. By looking at your various revenue streams, you can see which clients and which types of projects bring in the most income and the least income. This insight may influence where you choose to direct the majority of your time and effort, or determine the future goals you set for your business.

What is net income?

Net income is the profit your business earns after expenses and allowable deductions.

How to calculate net income

To calculate net income, take your gross income and subtract all of your business expenses—marketing or advertising costs, travel or office expenses, tax payments, etc.—as well as any deductions you may be eligible for such as a home office space, retirement plan, or legal and professional fees. Below we have used our bill rate calculator to calculate an example of  typical business expenses so that net income can be determined.

how to calculate net income

 

 

After you determine your expenses, you can calculate your net income vs gross income.  Using the above expenses in our bill rate calculator, here is the calculation that determines your gross income as $90,000 less your expenses of $30,000, making your net income $60,000.

gross income vs net income

Why is net income important?

Net income can help you understand the health of your business. For instance, if your gross income is significantly higher than your net income year after year, you may want to evaluate your expenses line-by-line to see what you can eliminate or reevaluate.

Understanding gross income and net income

Knowing your gross and net income is an important part of managing your finances on a personal level and managing a successful business if you are a small business owner or self-employed. It can also help you make important decisions about income choices, such as when to raise your rates, whether or not certain expenses are necessary, and the types of income, projects and clients that you should be focusing on.

Gross income and net income can provide a different perspective and affect goals and actions you may take personally or as a business owner. As a business, gross income can indicate the revenue generated year over year and give a perspective on how your business is doing. However, net income will tell you a slightly different picture – how much you are making after expenses are factored into the equation. If your net income is lower than expected, consider cutting some expenses.

To learn how to calculate your net income based on expenses and allowable deductions, try our calculator.

Related Posts

| 3 MIN READ

Top 5 Tax Write Offs for Self Employed Professionals

November 10, 2021

The ability to manage your business expenses is not just good for your company, it’s also a good income strategy as an independent professional. As a business of one, you will incur fixed costs that cannot be billed back to clients. You’ll also need to handle expenses such as health care, retirement funds, and other…

| 3 MIN READ

How to Bid on Projects for Consulting and Win

September 29, 2021

If you run your own independent business, you likely know that writing proposals and bidding on projects is an integral part of your job. However, the formal Request for Proposal (RFP) process can be filled with tedious details that can feel overwhelming. Due to the complexity of this process, it’s important to understand how to best assess…

MBO red logo
| 4 MIN READ

Filing Independent Contractor Taxes: 4 Best Practices

July 16, 2021

Filing taxes as an independent contractor can be a tricky road to navigate. When you work as an employee, your employer is required to withhold federal income tax as well as Social Security and Medicare taxes from your payroll check, but as an independent you’re on the hook to do this yourself. When you work…

Learn more about the MBO Platform

For Independent Professionals

Start, run, and grow your independent business with MBO

For Enterprises

Find, manage and retain top-tier independent talent