Gross vs Net Income: Differences and How to Calculate

By MBO Partners | June 10, 2022

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.

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.

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.

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

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.

Gross income vs 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

Independent pro

6 Things to Start NOW to Increase Your 2023 Billing Rate and Revenue

It’s the last quarter of the calendar year and time for 2023 planning.  As you work through your business goals and growth strategies for the coming year, consider your current rate schedule along with new ways to increase revenue. Refer to benchmark services that cover your market and skill set to compare the rates they…

Read More...
creating a proposal

GUIDE | 8 MIN READ

How to Write a Consulting Proposal: Template Included

Learn how to write and deliver proposals as a consultant.

Read More...
Scope of Work

GUIDE | 10 MIN READ

How to Write a Project Scope of Work (Guide and Templates)

Find a step by step guide on creating a document that outlines the basic details of your project with a client, as well as highlights key terms, such as payments, revisions, and key deadlines.

Read More...

Trending

Tags

Learn more about the MBO Platform

FOR INDEPENDENT
PROFESSIONALS

Start, run, and grow

your independent business with MBO

FOR
ENTERPRISES

Engage, scale, and optimize

your independent workforce