Personal Net Income Defined and Explained

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Simply put, income is defined as money that comes into your personal household, usually generated as compensation in the form of a paycheck for work you have done. Other sources of income might include selling goods or services by doing a side job, getting paid for consulting services or selling products you've made or are reselling on eBay, at craft fairs or at other venues.

Another form of income is passive income.

This type of income might be generated when you rent out rooms, homes or apartments. Or, it might be generated from earnings from 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 are gained from agreements made relating to copyrights, patents, or gas, mineral or petroleum properties. Even bartering can be a way of generating 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.

Specifics of Net Income and Tax Software

When reporting income on a tax return, tax software will help you determine what money was taken in during over the previous year constitutes income and helps when going through the tax interview.

Net income refers to take-home 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 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. Simply put, net income is gross income less deductions.

Financial software calculates your net income and keeps a running total, accessible via reports in the software.

You can record income in the account register as a split transaction, which includes gross pay (and the taxes and pre-tax deductions) found on your paycheck stub. If you have direct deposit, ask the 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 to answer 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 paycheck entries calculated as a scheduled transaction (by the software) and make adjustments as needed.

Net income is a simple, yet very important component of your personal finances. Having a clear understanding of how much money is coming into your personal household, and what differentiates it from your gross income, will give you a good grasp on your overall financial picture.