What is net profit?

Net income can be considered in several ways. Both companies and individuals analyze their net income and their gross income. Gross income is very easy to understand because it is simply everything a person or business makes, without taking any expenses or deductions into account. When people look at net income, they factor in deductions to come up with a net amount.

In business, net income would be the number you arrive at after certain things happen, such as paying taxes, paying employees, paying rent or building maintenance, and buying needed supplies. Net income can also be considered the company's profit or what the company keeps after all accounts are settled.

Sometimes companies talk about “earning” a certain amount of money, and this refers to looking at earnings or net income. It is usually a very different number from gross profit and much lower. Theoretically, a company can generate practically nothing if, after covering all expenses, there is no money left.

An individual's net income is calculated slightly differently. People do not deduct their rent or living expenses when calculating this amount. Instead, it's a simpler process.

Most people pay state and federal taxes, social security payments, and disability taxes. Some contribute money to a 401k and may pay some money towards health insurance payments. They can also contribute to a health savings account. All these things come out of the salary by reducing gross income.

Essentially, all deductions subtracted from the gross amount become net income. This can be called take home and can be significantly reduced from the gross amount. Consideration of what people will actually take home is very important when thinking about a salary; What's left when all taxes or payroll contributions are eliminated? Understanding the tax code and possible contribution to other programs can help people determine how much they need to earn to cover their daily living expenses, and this can be an important part of salary negotiation.

The percentage of income people earn can vary when taxes are built into a progressive plan. In a flat tax system, everyone pays the same percentage, but in progressive taxes, the percentage increases as wages increase, which means potentially lower net amounts. Another variable could be things like contributions to voluntary programs or to pay for health insurance. People can decide, for the most part, how much they want to contribute to a health savings account or 401k, but companies currently can choose how much people will pay for insurance if they choose to buy it.

One thing that some people find strange is the amount of social programs that are determined based on gross income rather than net income. People who could qualify for welfare can earn a lot when it's considered gross. The flip side of the coin is eligibility for loans, rents and credit, which is often determined in part by gross income, where people can get much more than they earn and can't actually afford a loan or rent.

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