Key takeaways
- Net income = revenue − COGS − operating expenses − interest − taxes.
- Gross income (or gross profit) is revenue minus COGS. Net income subtracts everything else too.
- Sole proprietors report net profit on line 31 of Schedule C. See About Schedule C.
- Every expense receipt you can’t find makes net income, and your tax bill, look higher than it really is.
What is net income?
Net income is the honest answer to “did the business make money?” Revenue tells you what came in. Net income tells you what you keep after paying for everything it took to earn that revenue.
For a sole proprietor or single-member LLC, the business itself doesn’t pay income tax. Its net profit flows to your personal return, where it’s taxed along with self-employment tax. So for most freelancers, business net income is the number taxes are built on.
Track every expense that shapes your net income with the Manage Receipt app.
Formula
Net income = Revenue − Cost of goods sold − Operating expenses − Interest − Taxes
Broken into steps, the way a profit and loss statement shows it:
- RevenueAll sales, less returns and discounts.
- Gross profitRevenue minus COGS.
- Operating incomeGross profit minus operating expenses.
- Net incomeOperating income minus interest, other items and any business-level tax.
Gross vs net income
| Gross | Net | |
|---|---|---|
| For a business | Revenue minus COGS | What’s left after all expenses |
| For an employee | Pay before withholding | Take-home pay after taxes and deductions |
| Shows | How profitable your products or services are | How profitable the whole business is |
A business can have strong gross profit and weak net income if overhead, ads or debt costs are too high. That gap is where expense tracking pays off.
Net income is also not the same as cash in the bank. Depreciation lowers net income without any cash leaving, while loan principal payments and owner draws take cash out without lowering net income. Look at cash flow alongside net income to see the full picture.
Example
A small online print shop, run as a sole proprietorship, for 2026:
| Line | Amount |
|---|---|
| Revenue | $120,000 |
| − Cost of goods sold | $48,000 |
| Gross profit | $72,000 |
| − Operating expenses | $30,500 |
| Operating income | $41,500 |
| − Interest on equipment loan | $1,500 |
| Net income (net profit) | $40,000 |
Net margin is $40,000 ÷ $120,000 = 33.3%. Because it’s a sole proprietorship, there’s no business-level income tax line. The $40,000 goes to the owner’s return.
Now suppose the owner lost receipts for $2,000 of software and shipping supplies. Operating expenses drop to $28,500 on paper and reported net income rises to $42,000. That’s $2,000 of profit that never existed, taxed anyway: it’s subject to income tax and, for a sole proprietor, self-employment tax too. Capturing every receipt when you pay is the simplest way to keep net income honest.
Accurate expenses, accurate bottom line
Net income is only as accurate as the expenses you can prove. Manage Receipt captures each receipt as you get it, categorizes it and builds an AI tax report of your deductible categories, so fewer costs slip through and your reported profit matches what you really earned.
Explore AI Tax ReportsFrequently asked questions
How do you calculate net income?
Take total revenue and subtract cost of goods sold, operating expenses, interest and any business-level taxes. For example, $120,000 revenue minus $48,000 COGS, $30,500 operating expenses and $1,500 interest leaves $40,000 net income. A profit and loss statement shows each step.
Is net income the same as profit?
Mostly, yes. Net income, net profit and the bottom line usually mean the same thing: what’s left after all expenses. “Profit” on its own is vaguer, because it can also mean gross profit or operating profit, which are earlier, larger numbers on the P&L.
Is net income before or after taxes?
For corporations, net income is after income taxes. For sole proprietors and most partnerships and LLCs, the business doesn’t pay income tax itself, so its net income is pre-tax. The owner then pays income tax and self-employment tax on it personally.
Can net income be negative?
Yes. When expenses exceed revenue, the result is a net loss. New businesses often have losses in early years. A sole proprietor’s Schedule C loss can generally offset other income, though limits apply, and the IRS may question repeated losses if the activity looks like a hobby.