What Is Net Income?
Definition & Examples of Net Income
Net income is the money that you actually have available to spend. It is equal to your total income minus tax payments and pretax contributions.
Learn what is included in net income and why it is important to your financial life.
What Is Net Income?
Income is how much money you bring in on a regular basis, usually either monthly or annually. For example, if you make $1000 per week, you would have a monthly income of about $4,333 and a yearly income of $52,000.
However, this isn't the same as your net income.
Income represents money that comes into your personal household, usually 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.
Net income is the money you actually receive and can spend.
How Net Income Works
Since net income is not the same number as how much money you earn, finding the value of your net income takes a small calculation.
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.
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.
Types of Income
The most common source of income for most people will be their weekly or monthly paycheck. Other sources of income might include:
- Selling goods online
- A second job or consulting services
- Social Security payments
- Gas, mineral, or petroleum rights
When calculating your taxes, child support payments are not considered part of your gross income. Whether alimony is considered part of your income depends on when your divorce settlement was filed.
Some people receive money from passive income sources. These are sources of income that don't require you to trade your labor for money, such as:
- Renting out rooms, homes, or apartment
- Capital gains, dividends, or interest on investments
- Interest-bearing accounts, such as savings accounts or some checking accounts
Do I Need to Know My Net Income?
Whether you are trying to create a manageable budget, save towards a goal, or file your taxes, knowing your net income will make your financial life easier. You can track your income and calculate your net with a variety of personal finance software.
These types of software will allow you to input paychecks, Social Security payments, or other forms of income, then calculate the total for you. Many will also have 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.
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 help you to make informed decisions about how you spend, save, and plan for the future.
- Net income is the money that you actually have available to spend.
- It is equal to your total income minus tax payments and pretax contributions.
- Common sources of income include a weekly or monthly paycheck, Social Security payments, royalties, and investment income.
- Knowing your net income is important for managing your finances and paying your taxes.
Social Security Administration: Ticket to Work. "Gross and Net Income: What's the Difference?" Accessed Aug. 29, 2020.
Healthcare.gov. "Using a Flexible Spending Account (FSA)." Accessed Aug. 29, 2020.
IRS.gov. "Question: Are Child Support Payments or Alimony Payments Considered Taxable Income?" Accessed Aug. 29, 2020.