Subtracting all sources of income from expenses results in net income.
You can calculate net income by simply adding income from all sources and expenses from all sources and subtracting expenses from income. Remember that income must include not only wages and payments, but also bonuses, alimony gifts, and other income that may or may not be taxable. Expenses should include things like bills and taxes, which some may ignore because they can be automatically deducted. Net income is different from gross income or taxable income.
The first step in determining net income is to find out how much gross income was generated in a given period, usually annually. If you’re calculating these numbers for tax purposes and you’re married, you may also need to consider your spouse’s income. In general, if you are employed, your YTD income will normally be on your statement. If you’re self-employed, you’ll likely need to submit receipts and statements from many different sources.
Once you’ve added up that number, the next step is to consider expenses. Common household expenses include but are not limited to debt payments, utility payments, insurance, food, and clothing. Business expenses also include insurance, debt, and utility payments, but there may be other things like payroll expenses. Many don’t track expenses or income, so arriving at an accurate net income is sometimes problematic. Also, remember to include all tax payments made during the year.
Once all these numbers are added, the next step is to subtract. Always subtract expenses from gross income, even if you end up with a negative number. It could be that your net income is a negative number if you suffered a loss that year. This happens only when expenses exceed gross income. If that’s the case, you may need to make some major adjustments to balance these numbers out or make a profit.
If you owe money, or money is expected to arrive after the time period considered, don’t add it. For example, if you owe money from the previous year that you haven’t paid in yet, it shouldn’t be included in your income calculation. Instead, add it to next year’s income after verifying that it was received. Likewise, the same applies to anticipated expenses. This gives you an accurate picture of what your net income was for the period in question, with the understanding that future payments will factor into next year’s figures.
