How To Calculate Gross vs Net Income: A Small Business Guide

As a small business owner or employee managing your own finances, understanding gross vs net income is important for both budgeting and understanding your tax obligations. Not only do you want to make every dollar count, you want to make sure you know how much you’ll take home at the end of the day.

Let's break down what the difference between gross and net income is and look at some examples to make it clearer.

What is gross vs net income?

Gross income refers to the total amount of money an individual or business earns before any deductions, taxes, or expenses are taken out. 

Net income is the other side of that coin: the amount of money an individual or business earns after deductions, taxes, and expenses have been subtracted from gross income. This figure represents what you actually take home or the profit your business retains after covering all expenses.

Some examples of gross income include:

• Salary, wages, tips, and commissions: This includes all the money you earn from your job or business before taxes and other deductions.
• Interest and dividends: Any earnings from investments like stocks or savings accounts fall under this category.
• Rental income: Money earned from renting out property is also considered gross income.
• Alimony received: If you receive alimony payments, this counts as part of your gross income.

On the other hand, some examples of deductions and expenses include:

• Business expenses: If you run a small business, the costs of keeping your business afloat—rent, utilities, employee salaries, and supplies, all detract from your gross income.
• Income taxes: These are the federal, state, and local taxes that are deducted from your earnings. For individuals, this includes taxes withheld from your paycheck. For businesses, this includes corporate income taxes.
• Social Security and Medicare taxes: Also known as FICA taxes, these are mandatory payroll taxes that fund Social Security and Medicare programs. They are deducted from your paycheck if you are an employee.
• Health insurance premiums: If you pay for health insurance through your employer, these premiums are deducted from your gross income. For businesses, this includes the cost of providing health insurance to employees.
• Retirement account contributions: Contributions to retirement accounts such as 401(k) or IRA plans are deducted from your gross income. These contributions can reduce your taxable income, providing a tax benefit while saving for the future.

What is the difference between gross and net income?

Also known as total income, gross income refers to the total amount of money your business has before expenses, taxes, or deductions are applied. Net income refers to the remaining number after all expenses, taxes, and deductions are calculated from your gross income. 

Is net income before or after taxes?

Net income is calculated after subtracting taxes from gross income. This means that net income reflects the actual amount of money left after all tax obligations have been met.

For small businesses, net income is the profit remaining after all expenses and taxes have been paid. Businesses start with their gross income, which includes total revenue from sales and other income sources. From this, they subtract operating expenses such as rent, utilities, salaries, and supplies. They also deduct taxes and any other financial obligations. 

The resulting figure is the net income, which indicates the business's profitability. This net income can be reinvested into the business, distributed to shareholders, or saved for future use.  For this reason, it’s important to base financial decisions on your net income vs gross income, but you should also find ways to maximize your net income.

How to calculate gross and net income for small businesses.

Calculating net vs gross income can seem overwhelming, but breaking it down step-by-step will help you get an accurate view of how your business is doing..

1. Calculate gross income.

To calculate gross income, you need to add up all sources of income before any deductions. This means summing up your business’ total revenue from sales, customers, clients and other income sources. Find the relevant records so that you can ensure your figures are accurate.

2. Calculate net income.

For businesses, net income is the profit remaining after all expenses, taxes, and depreciation are subtracted from total revenue. Subtract business expenses such as rent, utilities, salaries, supplies, and any other operational costs. Also, subtract taxes and depreciation.

For example, if a business has a total revenue of $200,000 and the following expenses:

• Business expenses: $120,000
• Taxes: $20,000
• Depreciation: $10,000

The net income calculation would be: $200,000 (total revenue) - $120,000 (business expenses) - $20,000 (taxes) - $10,000 (depreciation) = $50,000

This $50,000 is the business's net income, representing the profit after covering all costs and obligations. This figure is crucial for understanding the business's profitability and financial health, and where you can best apply these finance tips for small businesses. 

How to calculate gross income vs net income for individuals.

Perhaps you’re an employee trying to use the difference between net and gross income to understand how much pay you get to take home. Here’s how you calculate that figure:

1. Calculate gross income.

Add up all your income sources before deductions. This includes wages, salaries, tips, commissions, interest, dividends, rental income, and alimony. 

For example, if you earn a salary of $50,000, receive $5,000 in rental income, and $2,000 in dividends, your gross income would be $57,000. This figure represents your total earnings without any subtractions.

3. Calculate net income.

Net income for individuals is the amount left after subtracting various deductions from gross income. Now that you have your gross income, subtract income taxes, Social Security and Medicare taxes, health insurance premiums, and retirement account contributions.

For instance, if your gross income is $57,000 and you have the following deductions:

• Income taxes: $8,000
• Social Security and Medicare taxes: $4,000
• Health insurance premiums: $3,000
• Retirement contributions: $2,000

Your net income calculation would be: $57,000 (gross income) - $8,000 (income taxes) - $4,000 (Social Security and Medicare taxes) - $3,000 (health insurance premiums) - $2,000 (retirement contributions) = $40,000

This $40,000 represents your take-home pay after all deductions.

Why understanding gross vs net income matters.

Understanding the difference between gross vs net income helps you make informed financial decisions in various areas of your life and business. Here are a few ways you can use this knowledge to improve your business:

Budget and plan strategically.

To create an accurate budget for your business, you need to first know what you’re working with. Distinguishing between your total income and your actual spending money will help you avoid overspending or growing too quickly. 

Prepare for taxes.

Calculating for taxable income will always begin with knowing your gross income. Since some deductions will impact your tax liability, having a clear idea of how to go from gross to net income will help prevent surprises at tax season. Remember to maximize your deductions to further lighten the load.

Qualify for loans or financial assistance.

Lenders and financial institutions use gross income to assess your ability to repay loans, total earnings to determine loan eligibility and the amount you can borrow, and net income to evaluate your actual financial health and repayment capacity. If you’re looking to fund your small business, a clear view of your finances helps you understand what assistance you can receive.

Analyze your business’ financial health.

For businesses, gross and net income are key indicators of financial health. Gross income shows total revenue, while net income reveals the profit after all expenses. Regularly monitoring these figures helps you assess business performance, identify cost-saving opportunities, and make strategic decisions, ultimately helping build a sustainable business. 

Get insight on your income with ease. 

Knowing the difference between gross vs net income empowers both small business owners and their employees to plan financially for the future. But manually calculating all income sources with piles of paperwork is a stressful, time-consuming process. 

Luckily, Homebase offers a complete, easy-to-use tool for small businesses to automate payroll, track time, comply with HR best practices and labor law—and more. 

As a small business owner, Homebase provides you with clear records of your own income details so you and your team have all the information you need to accurately calculate your gross and net income. Get started today.