Net income is the income you are left with after all expenses, taxes, and levies have been taken care of. It’s your take-home piece of the income pie.
(Note: your income may not be edible).
Why is it useful to know your net income?
The best reason is probably to make sure that you don’t mix it up with gross income.
Gross income is the pre-tax income that you and your employer or client have agreed on. If you spend from your gross income, you may accidentally spend money you owe in taxes.
For example: let’s say you’ve spent ten hours making incredible spreadsheets for a client, at an agreed rate of $100 per hour. All in all, you’ll make $1,000.
You won’t be keeping that full amount. $1,000 is your gross income, pre-deductions.
How is net income calculated from gross income?
This will depend on your individual circumstances – for example, any tax deductions you’re eligible to claim, your tax rate, your HELP/HECS debt (if any), and whether you may need to pay the Medicare levy surcharge.
For people on a PAYG salary, their employers will do the maths to make sure that the right amount goes to the ATO – meaning that everything that lands in their account is (generally) their net income.
But self-employed individuals have to crunch the numbers themselves. Sorry!
Calculating net income
As a starting point, you’d lower your taxable income by claiming tax deductions. From there, you can calculate how much you need to set aside for income tax, the Medicare levy, and other amounts that may apply (like any student loan repayments) – and whatever’s left after those is your net income.
If this is all sounding a bit much, our self-employed tax calculator will give you a basic estimate of the amount of tax you may need to set aside.
Better yet, if you’ve got a Hnry account, we’ll be beavering away at the calculations on your behalf at this very moment.
So then what happens with net income?
It’s yours! To help remember the term, maybe think of it as the income that you can scoop up in your net, or in your pocket (trouser-nets). That isn’t why it’s called that, it derives from Latin, but it’s a bit of fun.
Hold your net aloft and capture all the post-tax income. A mighty catch indeed.
Is net income the same as net profit?
This is the one last bit you might need to know — net income and net profit aren’t the same thing.
Net profit depends on the costs involved with creating and selling your goods or services, and it’s worked out before tax. Net income is what’s left after tax.
For example, if you earned $1,000 and spent $100 on paint to make an artwork, your net profit would be $900. Tax is then applied to that amount, and whatever’s left after tax is your net income.
If you’d spent the full $1,000 on materials, your net profit would be $0 — meaning there’d be no profit to tax, and no net income left to take home.
More information please, I simply love this stuff!
If you’re still interested in learning more about profit, or you’re just more of a fan of lemonade-based analogies, you can read our more detailed guide on measuring and growing profits.
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