What is Net Income?

By MBO Partners | June 25, 2021

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What Is Net income?

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

Why Is Net Income Important?

As an independent professional, it is important to have a good handle on your finances. Knowing where your business stands financially can help you make important decisions such as setting bill rate, determining your budget for new equipment or marketing costs, or what types of projects you should pursue.

Net income can help you understand the health of your business by giving you a picture of how much you are making after expenses are factored in. If your net income is lower than expected, consider cutting some expenses. Similarly, if your gross income (the total amount you earn before subtracting expenses) 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.

How Do You 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.

In this example, let’s assume your gross income is $90,000 per year. After you determine your expenses, you can calculate your net income: $90,000 minus your expenses of $30,000 = a net income $60,000. In order to earn a gross income of $90,000, you will need to set a target bill rate of $50 per hour.

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