Personal Net Income Defined and Explained
Simply put, income represents money that comes into your personal household, usually generated as compensation in the form of a paycheck for work you have performed. Other sources of income might include selling goods online or services by doing a side job, getting paid for consulting services or selling products you've made on eBay, at craft fairs or at other venues.
Once you remove all of the expenses you must pay, such as payroll taxes and pretax contributions, you'll arrive at your personal net income.
Some people receive compensation from passive income sources, which you might receive when you rent out rooms, homes or apartments. You could also receive passive income in the form of capital gains, interest or dividends on investments or interest-bearing accounts like savings accounts or some checking accounts.
Other types of income come from royalties, which come from agreements made relating to copyrights, patents, or gas, mineral or petroleum properties. Even bartering can generate income if you strike a good deal and perform a service in exchange for taking possession of a motorcycle, for example, and then turn around and sell that bike.
Calculating Net Income
Net income refers to the remainder of your pay, or the amount of money earned after payroll withholding, such as state and federal income taxes, social security taxes and pretax benefits like health insurance premiums, retirement plan investments or commuting costs.
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. Your net income equals your gross income less all of these deductions.
When reporting your income on a tax return, tax software can aid you in determining how much money you made during the previous year that constitutes income, and it can help uncover any income sources you may have forgotten about, once you go through the tax interview.
Certain types of income, such as tax-free municipal bond interest, don't count as income for tax purposes and wouldn't be included on your tax return, but might be included in your personal net income calculation.
Financial software can calculate your net income and will keep a running total, accessible via reports in the software. You would record income in the account register as a split transaction, which helps you account for gross pay and each of the taxes and pre-tax deductions found on your paycheck stub.
If you have direct deposit, ask your company 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.
Accounting for Net Income on Personal Finance Software
Some personal finance software, like Quicken, has a feature for entering your paycheck information initially, then again each time you're paid and the taxes and pre-tax deductions are netted out from the gross pay.
However, income taxes fluctuate by a few pennies throughout the year, so each pay period, you should check the paycheck entries calculated as a scheduled transaction in your software, and make any adjustments to the amounts as needed.
Net income serves as a simple, yet important indicator of your personal financial position. 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 on your overall financial picture.