Net income is the income you are left with after all expenses, deductions (like ACC levies) and taxes 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 expenses you’re eligible to claim, your tax rate, your level of KiwiSaver contributions, your student loan status, and your ACC levies rates.
For people on a PAYE salary, their employers will sort the maths to make sure that the right amount goes to the IRD and ACC – meaning that everything that lands in their account is their net income.
But self-employed individuals have to crunch the numbers themselves. Sorry!
As a starting point, you’d lower your taxable income by claiming business expenses. From there, you can calculate the amount of income tax, ACC levies, and other contributions you may owe.
If this is all sounding a bit much, our self-employed tax calculator will give you a basic estimate of the amount of tax and levies 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 – if you’ve ended up with $750 as net income, while it’s all yours, you might not be able to consider all of this as business profit. That’ll depend on any costs involved with creating and selling your goods or services. If you’d spent $100 on buying paint to make an artwork, for example, your net profit would be $650.
If you’d spent exactly $750 on buying really expensive paint, then you wouldn’t want to get too excited about your net income of $750, as your net profit would be $0.
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.
