Gross vs Net Income

Did you know?

Gross and net income are often mixed up when talking about the financials of a business. The main difference between gross and net income is that gross income is the total revenue, where net income is the income after all deductions have been made.

So, where gross income is the top line of earnings, net income deducts things like expenses, overheads, interest payments and tax. Both terms describe income, but net income one takes into account all deductions.

For employees, you have gross and net pay which works in the same way. Gross pay is your total salary, and net pay is what you actually take home after state and federal taxes, insurance payments etc.

What is Gross Income?

Gross income and gross profit are used interchangeably. For a business, gross income is the total amount of revenue after deducting the cost of goods sold (COGS).

Put simply, the gross income (or profit) is the income left after the costs of making the product is factored in. This doesn’t include any other expenses that may have been incurred, such as sales costs or admin costs.

For an employee, your gross income is the same as your gross pay. This is your total salary amount before any state or federal taxes have been deducted, as well as health care deductions, employee benefits etc.

Gross income for an employee is the total amount an employer pays you, but it’s not the amount you receive.

What is Net Income?

Net income (or net profit) is the amount of revenue left after deducting all expenses from your gross income. Put simply, you deduct all expenses (sales, admin, software, etc) from your gross income. The resulting amount is your net profit.

For an employee, your net income is your net pay. This is the amount left after deducting taxes, benefits, healthcare etc from your gross pay.

Gross vs Net Income Formula

In sales, gross and net sales are given by the following formula:

$Gross\: Sales = Products\: Sold \times Price\: per\: Product$ $Net\: Sales = Gross\: Sales - (Discounts + Allowances + Returns)$

Alternately, gross and net profit amount are calculated by the following formula:

$Gross\: Profit = Net\: Sales - Cost\: of\: Goods\: Sold$ $Net\: Profit = Gross\: Profit - Expenses$

For individuals, gross income is the total amount the individual is supposed to be paid by his employer.

Net income for an individual is given by the following calculation:

$Net\: Pay = Gross\: Pay - Deductions (\text{Taxes, Insurance, Pensions etc})$

Gross vs Net Income Example

To clearly understand the gross and net sales for companies consider a company, Green Solutions that produce herbal supplements.

• Sales: $147,000 • Cost of goods sold:$78,300
• Distribution costs: $9,250 • Electricity/utility costs:$2,400
• Maintenance costs: $7,000 • Taxes:$5,000
$Gross\: Profit = \147{,}000 - \78{,}300 = \68{,}700$ $Net\: Profit = \68{,}700 - (\9{,}250 + \2{,}400 + \7{,}000 + \5{,}000) = \45{,}050$

We could then work out the net profit margin by dividing the net profit by total revenue:

$Net\: Profit\: Margin = \dfrac{\45{,}050}{\147{,}000} = 30.65\%$

This shows that Green Solutions has a profit margin of 30% and you could compare that with other companies in the industry to determine whether they are performing well.

Gross vs Net Income Analysis

From the example given, gross applies to different things. In sales, it is the monetary value of all products or services a company has been able to sell to the market. It gives the value of the potential overall revenue the company can generate. However, net sales represent the actual revenue that the company has made, not counting the revenue lost as a result of promos or discounts.

The concept of gross and net is also applied to profit. Gross profit describes the overall profit the company can potentially make. This means that if a company can keep reducing its auxiliary costs, it will improve its net profit. It should also be noted that for companies, their income is taxed after all expenses have been made. Net profit is the money that goes to the coffers of the company.  The company can use its net profit to pay shareholders, invest in improving the company, do research and other things.

Gross vs Net Income Conclusion

• Gross is the overall revenue that can come to a company or an individual and it represents the potential income of a person or company.
• The net revenue is the actual revenue that a company gets after discounts and other allowances are deducted.
• Net profit is the remaining cash after all expenses and taxes and interests have been paid.
• Net profit represents how much the company can spend. It shows how profitable a company is. For individuals, net income describes how much they can take home.

Gross vs Net Income Calculator

You can use the gross and net income calculator below to quickly calculate a company’s gross and net income by entering the required numbers.