How to calculate net income
Learn the net income formula, work through examples, and see what your bottom line means.
December 2023 | Published by Xero
Published Thursday 23 July 2026
Table of contents
Net income (and its equation) is the same as net profit.
Key takeaways
- Net income is the profit left after you subtract all your expenses, including tax, from your revenue. It's also called net profit or the bottom line.
- The formula is net income = revenue − expenses − tax.
- Gross profit and net profit measure different things, so it helps to keep the terms clear and use each one consistently.
- Net income shows profit on paper, which isn't the same as the cash sitting in your bank account.
Before you can track your profit or make confident decisions, you need to know what net income actually measures. Here's a plain definition to start with.
What is net income?
Net income is the profit that's left after you subtract all your expenses, including tax, from your revenue. It's also known as net profit or the bottom line.
Working out net income is straightforward once you know the formula. Here's the calculation and the steps to follow.
How to calculate net income
The net income formula is net income = revenue − expenses − tax. You add up what your business earned, take away every expense, then subtract the tax you owe.
Follow these 3 steps to calculate net income:
- Add up your total revenue for the period.
- Subtract all your business expenses, such as wages, rent, and supplies.
- Subtract the tax you owe on your profit to get your net income.
A worked example makes the formula easier to apply to your own numbers. Here's how it looks for a small business.
Example of a net income calculation
Say your business sells $35,000 worth of products, your expenses come to $17,000, and your tax is $6,000. The net income calculation goes like this:
$35,000 − $17,000 − $6,000 = $12,000
Your net income after expenses and tax is $12,000. You can reinvest that profit in the business or distribute it to the owners.
You can also reach net income by starting from your gross profit rather than your total revenue. This route fits businesses that track the cost of making their products separately.
Calculating net income from gross profit
Starting from gross profit, the formula becomes net profit = gross profit − operating expenses − tax. Say your business sells $35,000 worth of products and it costs $14,000 to make them, so your gross profit is $21,000.
Your operating expenses come to a further $3,000, and you owe tax of $6,000. The calculation goes like this:
$21,000 − $3,000 − $6,000 = $12,000
You land on the same $12,000 net income, just by a different route.
Gross profit and net profit are easy to mix up, but they measure different stages of your profit. Getting the terms right keeps your reporting accurate.
Gross profit vs net profit
Gross profit is your revenue minus the cost of goods sold (COGS), which is what it costs to produce or buy the products you sell. Net profit takes that gross profit and subtracts all your other operating expenses and tax, which is why net profit is the same as net income, your bottom line.
The difference matters when you look at your net profit margin, because a healthy gross profit can still leave a thin net profit once overheads and tax come out.
Revenue, operating income, and net income each describe a different point on the way from sales to profit. Knowing which is which helps you read your reports correctly.
Net income vs revenue vs operating income
Each figure strips away more cost than the one before it:
- Revenue is the total money your business earns from sales before any deductions
- Operating income is your operating profit, or the profit from your core operations before tax and interest
- Net income is what's left after every expense and tax is taken out
Net income is one of the clearest signals of how your business is really doing. It shapes the decisions you make about spending and growth.
Why net income matters
Net income is the money your business keeps after all expenses are paid, and it's what a sole trader pays themselves from. You can bank it to smooth out cash flow, save it for a quieter period, or reinvest it to grow.
Tracking net income over time is the simplest way to gauge your profitability and spot whether costs are eating into your profit. In New Zealand, you also pay income tax to Inland Revenue on your business profit, so net income gives you a clear picture of what's yours to keep.
A strong net income doesn't always mean money in the bank. It's worth understanding how profit and cash differ.
Net income vs cash flow
Net income is profit on paper, while cash flow is the actual money moving in and out of your business. You can show a healthy net income and still be short on cash if customers haven't paid their invoices yet, or you can hold plenty of cash in a month you record a loss.
Small errors in your figures can throw off your net income and lead to decisions based on the wrong number. These are the slip-ups to watch for.
Common mistakes when calculating net income
Keep an eye out for these common mistakes when you calculate net income:
- Leaving tax out of the calculation, which overstates your profit
- Confusing revenue with profit and treating total sales as what you keep
- Forgetting one-off or irregular expenses that still reduce your profit
- Mixing up gross profit and net profit when you report your figures
Keeping your revenue, expenses, and tax in one place makes net income far easier to track. Xero brings your numbers together so you can see your profit update as you go.
Track your net income with Xero
With Xero, your income and expenses flow into simple reports, so you can check your net income without adding up figures by hand. You get a real-time view of how your business is tracking, which makes it easier to plan for tax and growth. Try Xero today and get one month free.
FAQs on net income
Here are answers to some frequently asked questions about net income to clear up the terms and the timing.
Is net income the same as net profit?
Yes, net income and net profit are the same figure, your bottom line. Both describe the profit left after you subtract every expense and tax from your revenue.
Is net income before or after tax?
Net income is calculated after tax. You subtract the tax you owe as the final step, so net income reflects the profit you actually keep.
What is the difference between net income and revenue?
Revenue is the total money your business earns from sales before any deductions. Net income is what remains once you subtract all expenses and tax from that revenue.
How can I improve my net income?
You can lift net income by growing revenue, trimming unnecessary expenses, or doing both at once. Reviewing your costs and pricing regularly helps you find room to improve.
Related terms
Learn more about net income
Handy resources
Advisor directory
You can search for experts in our advisor directory
Explore our guides
Find guides with expert advice and tools to help manage and grow your business
Financial reporting
Keep track of your performance with accounting reports
Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.