What Is Net Income?
How to Find Your Personal Net Income
Your personal net income is all the money you bring in—in the form of wages and other payments—minus required expenses such as taxes.
Income represents money that comes into your personal household, usually generated as compensation for work you have performed. Once you subtract expenses such as income taxes and pretax contributions, you'll arrive at your personal net income—the money you actually receive and can spend .
The most common source of income for most people will be their paycheck. Other sources of income might include selling goods online; money made from a second job; getting paid for consulting services; or selling handmade products on eBay, at craft fairs, or at other venues.
Some people receive money from passive income sources. These are sources of income that don't require you to trade your labor for money. For example, you might receive passive income when you rent out rooms, homes, or apartments. You could also receive passive income in the form of capital gains, dividends, or interest on investments or interest-bearing accounts (such as savings accounts or some checking accounts).
You may receive income from royalties, which come from agreements made relating to copyrights, patents, or gas, mineral, or petroleum rights. Even bartering can generate income. For example, if you strike a good deal and perform a service in exchange for taking possession of a motorcycle, then turn around and sell it, you've generated income.
Calculating Net Income
To calculate your personal net income, you'll add up all your income from various sources. The sum is your gross income.
Then, you'll subtract payroll taxes and other required withholdings to find your net income.
Examples of some of these deductions and withholdings include:
- State and federal income taxes
- Social Security taxes
- Health insurance premiums
- Pre-tax retirement plan contributions
If you are enrolled in a flexible spending account (FSA) to pay for medical costs, the amount withheld from each paycheck is calculated on a pre-tax basis.
Help With Calculations
When reporting your income on a tax return, tax prep software can aid you in determining how much money you earned, as well as help uncover any income sources you may have forgotten about.
Financial software can also calculate your net income and will keep a running total for you, accessible via reports in the software. You would record income in the account register as a split transaction, so you can account for gross pay and each of the taxes and pre-tax deductions found on your paycheck stub.
If you have direct deposit (meaning you don't receive paper checks), ask your company's human resources department, or the person who manages payroll, how you can get a record of each check with these details. You'll also want to ask that person any questions you have regarding the different deductions on your paycheck.
Tracking Your Net Income
Net income serves as a simple yet important indicator of your personal financial position. Because of this, you may wish to track this figure regularly, which you can do easily with the aid of personal finance software. For example, Quicken has a feature that lets you perform a one-time setup of your paycheck and all its components, including taxes and contributions, so you can easily track your net income going forward.
Having a clear understanding of how much money comes into your personal household, and what differentiates it from your gross income, will give you a better grasp of your overall financial picture and allow you to make informed decisions.
Social Security Administration: Ticket to Work. "Gross and Net Income: What's the Difference?" Accessed Feb. 14, 2020.
FederalReserve.gov. "Report on the Economic Well-Being of U.S. Households in 2018," Page 11. Accessed Feb. 14, 2020.
IRS.gov. "Types of Income." Accessed Feb. 14, 2020.
IRS.gov. "Definition of Adjusted Gross Income." Accessed Feb. 14, 2020.
Healthcare.gov. "Using a Flexible Spending Account (FSA)." Accessed Feb. 14, 2020.
Quicken Help. "How Do I Set Up a Paycheck?" Accessed Feb. 14, 2020.