How to calculate net income: formula and steps

Understanding your business’s profitability starts with one essential metric: net income. Also known as the bottom line, net income reveals how much money your company actually keeps after covering all expenses, including operating costs, interest, taxes, and more.

In this guide, we’ll walk through how to calculate net income and how it's different from gross income, explain the net income formula, and explore why this metric is so crucial for business leaders, finance teams, and investors. Whether you're preparing a financial statement or forecasting growth, it never hurts to know your numbers. 

What is net income?

Net income, also called net profit or net earnings, is the amount a business earns after subtracting all of its expenses from total revenue. This includes operating costs, taxes, interest, depreciation, and any other costs associated with running the business. It’s the final line item on the income statement, often referred to as the “bottom line,” and reflects the company’s overall profitability during a specific period.

Unlike gross income, which only deducts the cost of goods sold (COGS), net income accounts for all business expenses, including those that are not directly related to the sale of goods or services. And while operating income excludes non-operating costs like taxes and interest, net income captures the full financial picture.

Businesses, investors, and analysts rely on net income to gauge a company’s financial performance. It plays a vital role in calculating earnings per share (EPS), assessing tax obligations, and evaluating a company's long-term profitability.

In short, net income shows how much profit a business actually keeps after paying all of its bills.

How to calculate net income

To calculate net income, you’ll need to understand how each component of the income statement contributes to the final number.

Revenue (or total income)

This is the total money your business earns from its operations, whether from selling products, offering services, or collecting fees. Total revenue is the top line of the income statement.

Cost of goods sold (COGS)

Cost of goods sold (COGS) refers to the direct costs of producing goods or services sold. This includes materials, labor, and manufacturing overhead tied to production.

Operating expenses

These include rent, utilities, marketing, administrative salaries, software subscriptions, and other operational expenses.

Depreciation and amortization

These non-cash expenses reflect the reduction in value of tangible and intangible assets over time. They’re included on the income statement and reduce taxable income.

Interest expense

This refers to the cost of borrowing money, including loan interest payments and the cost of lines of credit. It’s listed as a separate line item before taxes.

Taxes

This includes federal, state, and local income taxes owed by the business. Taxes are typically one of the final deductions before arriving at net income.

The net income formula explained

Here’s the basic net income formula:

Net Income = Revenue – Expenses

More specifically:

Net Income = Revenue – (COGS + Operating Expenses + Depreciation + Interest + Taxes)

Example 1: Simple calculation

• Revenue: $500,000
• Expenses: $400,000
• Net Income = $500,000 – $400,000 = $100,000

Example 2: Breakdown by category

• Revenue: $600,000
• COGS: $200,000
• Operating expenses: $150,000
• Depreciation: $20,000
• Interest: $10,000
• Taxes: $50,000
• Net Income = $600,000 – ($200,000 + $150,000 + $20,000 + $10,000 + $50,000) = $170,000

Common mistakes when calculating net income

Accurately calculating net profit is essential for understanding your company’s financial health, but it’s easy to get it wrong if you're not careful. Here are some of the most common mistakes businesses make when determining net income:

Not including all operating expenses

Some businesses overlook everyday costs like office supplies, software subscriptions, or employee benefits. Leaving out these operating expenses can inflate net income and present an inaccurate picture of profitability.

Misclassifying one-time gains

Occasional events, such as selling a piece of equipment or receiving insurance payouts, shouldn’t be treated as regular operating revenue. Including these as part of ongoing earnings can distort the net income calculation and mislead stakeholders.

Ignoring depreciation or amortization

Depreciation and amortization are non-cash expenses, but they still reduce taxable income and must be included in the calculation. Failing to factor them in understates your total expenses and overstates net income.

Failing to account for taxes properly

Some businesses make the mistake of using estimated or outdated tax figures instead of actual liabilities. Inaccurate tax reporting can result in either overstating net earnings or facing unexpected tax penalties later.

Mixing operating and non-operating items

Combining core business income with non-operating gains or losses, such as investment returns or foreign exchange fluctuations, can make it harder to assess operational performance and lead to confusing net income figures.

Net income vs gross income: key differences

Net income and gross income are both crucial metrics in financial reporting, but they serve different purposes and are calculated using different inputs. Understanding how they differ can help you make better business and investment decisions.

Calculation process

To calculate gross income, you subtract the cost of goods sold (COGS) from total revenue. It shows how much money a business makes from its core products or services before accounting for any other expenses.

Net income, on the other hand, is what remains after deducting all business expenses, including operating costs, interest, taxes, depreciation, and amortization, from revenue. It represents the company’s total profit.

Role in financial statements

Gross income appears near the top of the income statement and provides insight into production efficiency and pricing strategy. Net income appears at the bottom and offers a comprehensive view of profitability after all costs.

Types of deductions and expenses considered

Gross income only considers direct costs tied to production, while net income includes both direct and indirect expenses. This makes net income a more complete indicator of financial performance.

Usage in financial analysis and decision-making

Gross income is useful for analyzing cost management and operational efficiency. Net income is used to evaluate overall profitability, calculate earnings per share (EPS), and determine a company’s ability to generate returns for investors.

Impact on taxes and budgeting

While both figures are important, net income is typically used for tax reporting and financial planning. It helps determine how much a business owes in taxes and how much profit can be reinvested or distributed.

How Rippling helps you manage your finances accurately

Rippling’s spend management software gives finance teams the visibility and control they need to manage every aspect of business spend, from payroll and employee expenses to vendor payments and software subscriptions, all in one unified system.

With Rippling, you can:

• Automate payroll with precision: Run payroll in minutes with built-in compliance and automatic tax filings, so every deduction and benefit is accounted for.
• Track employee spend in real time: Issue corporate cards with built-in policy controls and sync every transaction directly to your general ledger for more accurate income statements.
• Centralize expense management: Capture receipts, approve expenses, and reimburse employees faster—all from a single dashboard.
• Eliminate manual data entry: Rippling connects seamlessly with your accounting software, ensuring accurate and up-to-date income statements without the need for back-and-forth.

By combining HR, IT, and finance into a single platform, Rippling helps you reduce errors, increase efficiency, and make smarter financial decisions, all with your company's bottom line in mind.

FAQs about the net income formula

What is the formula for determining net income?

The standard net income formula is:
Net Income = Revenue – Expenses

This net income equation is total revenue minus all operating and non-operating costs such as cost of goods sold (COGS), operating expenses, interest, depreciation, and taxes. It’s the most widely used method for understanding a company’s profitability.

How do I calculate net income in accounting?

In accounting, the net income calculation starts with total revenue and subtracts all relevant expenses, including non-cash charges like depreciation and amortization. This approach follows standard accrual accounting practices to ensure accuracy across financial statements.

Can net income be negative?

Yes. If your total expenses exceed your total revenue, you’ll end up with a negative net income, also known as a net loss. This can happen during periods of high investment, unexpected costs, or declining sales.

How do I get net income for my business?

To figure out how to get net income, gather data from your profit and loss statement: total revenue, cost of goods sold, operating costs, interest, taxes, and depreciation. Subtract all of these expenses from your revenue to calculate your net income for the period.

Why is net income important for investors?

Investors rely on net income to evaluate a company’s profitability and long-term viability. It plays a direct role in calculating earnings per share (EPS) and influences stock valuation, lending decisions, and overall market confidence.

This blog is based on information available to Rippling as of June 11, 2025.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.