Usually, gross income is the bigger number and net income is the smaller number. In a Nutshell Gross income and net income can mean different things depending on the situation. In general, gross income is the total income you earn on your paycheck, and net income is the amount you receive after deductions are taken out.
Advertiser Disclosure We think it's important for you to understand how we make money. Gross income and net income are fairly easy to understand, but the terms can have different meanings depending on the situation. Show Hide. About the author: Lance Cothern is a freelance writer specializing in personal finance.
Lance holds a Bachelor of Business Administration in … Read more. Understand how gross income and net income are defined in order to understand their key differences. Gross income is the total amount you earn typically over the course of a year before expenses.
To calculate your annual gross income , add up your total client billings for the past year. Gross income is a helpful way to look at the revenue potential of your business and to assess how you are doing year over year. By looking at your various revenue streams, you can see which clients and which types of projects bring in the most income and the least income.
This insight may influence where you choose to direct the majority of your time and effort, or determine the future goals you set for your business. Net income is the profit your business earns after expenses and allowable deductions. To calculate net income, take your gross income and subtract all of your business expenses—marketing or advertising costs, travel or office expenses, tax payments, etc.
Below we have used our bill rate calculator to calculate an example of typical business expenses so that net income can be determined. After you determine your expenses, you can calculate your net income vs gross income. Net income can help you understand the health of your business. That figure is also useful to lenders and landlords so they can determine whether they will loan you money or rent you a property.
After figuring out how much you take home, look at what that total is during the course of one month. Once you know what you take home every month, start tracking how much you spend every month. Start with your fixed costs, such as your rent or mortgage, utility bills, student loans and anything else that requires a monthly payment. Next, round up your variable expenses. These may include your monthly grocery bill, gas for your car, credit card bill and any other costs that are typically variable.
Take this total and subtract it from your total monthly net income or take-home pay. A simple rule of thumb is to save that money every month or use it to pay down high-interest debt. Consider looking at your expenditures to decide where you can feasibly cut spending.
As a verb, net can mean to catch, ensnare , or take with a net. But where net can get confused with gross is when dealing with numbers. As opposed to gross , net as a noun can mean a net income or profit. For example:. This looks at the big picture sale price, while net looks at the end profit.
Typically, your gross profit will likely be higher than your net profit, and what you walk away with is your net— not gross— earnings.
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