Last updated:

# Net Income Calculator

What is net income?How to calculate the net income?The formula to calculate net incomeAn example of net income after tax calculatorFAQs

The net income calculator is a powerful tool that can help determine if your company/start-up is profitable. Of course, we all want to build a hyper-profitable enterprise, but the question is always, how to go about doing it? One key point is to know how to calculate the net income. This article will cover:

• The formula to calculate net income;
• How to calculate net income loss;
• What has to happen if there is a net income loss;
• How to use net income after tax calculator; and more.

## What is net income?

Net income is the end profit for the company owner, or in case there would be several owners, its shareholders. This value already discounts all the expenses, interest payments, and taxes related to the revenues made during a particular fiscal period.

If net income is positive, we also call it "profit". If the net income is negative, we can call it "net income loss" or simply "net loss".

A company can decide to pay dividends to its owner or shareholders from the profits earned. In that case, we should manage the dividend payout ratio to keep everything under control. Visit the Dividend Payout Ratio Calculator to learn more.

## How to calculate the net income?

To calculate the net income, we have to start with the primary source of cash inflow or revenue. Revenue can include the income from selling products or services.

However, there were costs related to the products sold or services provided, like materials and labor consumed to create the goods. We need to subtract those directly related costs. So:

1. **First, we subtract cost of sales ** (also known as COGS: cost of goods sold) from revenues. As a result, we get gross profit.

2. **Second, we take out all the operating expenses ** such as distribution, sales force, and administrative costs, among others. Accountants call the result: Operating profit.

3. Third, we have to pay interest on our debts (Interest paid), if any.

4. Fourth, we have to discount the stake of the taxing authority. Here we discount profit taxes.

They want their money before you receive your part, so they will tax you on the profit after direct costs, operating expenses, and interests.

5. **Finally, we have net income ** if the result after all deductions is positive.

## The formula to calculate net income

We can express all that was mentioned above in a mathematical equation:

Net income = Operating income - Interest paid - Profit taxes,

where:

Operating income = Gross profit - Operating expenses; and

Gross profit = Revenue - Cost of sales.

Remember that most of the time, companies or businesses have to pay a corporate tax rate that the government sets. If case you know your tax bracket, you can proceed this way:

Net income before taxes = Operating income - Interest paid

Net income = (1 - Tax bracket) Γ Net income before taxes

Profit taxes = Net income before taxes Γ Tax bracket

Here you can intuit that you will earn more profit if you sell more. That's not always true, however. Indeed, having a significant revenue growth can boost your net income, but if your variable costs increase as your revenue increases, the profit will be the same. Here an important concept to check is the contribution margin covered in our how to calculate contribution margin calculator.

Another insight from the net income formula is that there are several gears you can shift to improve your net profit margin, such as liquidating your debt or reducing direct/indirect costs (lean structure).

## An example of net income after tax calculator

We will consider a company with the following characteristics per quarter:

• Total revenue = $100,000 USD. • Cost of sales (COGS) =$40,000 USD.

• Operating expenses = $20,000 USD • Interest paid =$5,000 USD

• Tax bracket = 30%

If we use the previous formula to calculate net income, we will have:

1. Gross profit = 100,000 - 40,000 = $60,000 USD. 2. Operating income = 60,000 - 20,000 =$40,000 USD.

3. Net income before taxes = 40,000 - 5,000 = $35,000 USD. 4. Net income = 35,000 Γ (1 - 30%) =$24,500 USD

5. Profit taxes = 30% Γ 35,000 = \$10,500 USD

Note: If we had operating expenses more significant than 60,000, we would have a net income loss. Thus, it is essential to consider not only our direct related costs but also all non-direct costs.

FAQs

### How to use our tool as a net to gross income calculator?

The net income calculator is so powerful that it can calculate the gross income from the net income. You have to put in the desired net income and build up the calculator in reverse.

Once you know the corporate tax percentage, you can get the profit before taxes and continue estimating your gross income by adding the expected operating expenses and projected interest payments.

### How to calculate net income loss?

1. Find out all the costs that are directly related to the product you sell.
2. Subtract those costs from your total revenue.
3. From the result in step 2, deduct the operating expenses and all interest payments you have to make to cover your debts.
4. If you have a negative result, you have a net income loss

### How do you improve net income margins of a business?

1. Reduce direct costs or increase the price of your product/service.
2. Optimize all your operating expenses. Here is where you have more room for improvement. You can reduce your distribution costs by creating business partners with distributors, start advertising online, etc.
3. Liquidate your debt or renegotiate it.

### What is the difference between gross profit and operating income?

The main difference between gross profit and operating income is the previous only discounts all costs directly related to the product sold. Such costs include raw material and manpower, among others.

Operating profits include indirect costs related to the operation of the business like sales force, business administration, R&D (research and development), and marketing.

### What is the difference between operating income and net income?

Net income starts from operating income and then discounts debt interests and taxes from it. It represents all the available money for the company's new projects, dividends, and share buybacks.