Business Concepts
Net Income Formula (2026): Full Calculation Guide
The net income formula subtracts costs, interest, and taxes from revenue to show true profit. See examples and how it compares to working capital.
Net income is revenue minus every expense: cost of goods sold, operating expenses, interest, and taxes. A firm with $500,000 in revenue and $357,000 in total costs has $143,000 of net income, a 28.6% net profit margin. Get it wrong and every ratio built on top of it, from margins to valuation, is wrong too.
Disclaimer: This article is for general information only and isn’t financial, investment or tax advice. Rates, fees and rules change; check the provider’s or regulator’s official source or talk to a qualified professional about your situation.
Quick answer
Net Income = Total Revenue - Cost of Goods Sold - Operating Expenses - Interest - Taxes. It's the final line on the income statement, often called the "bottom line," and it feeds retained earnings, earnings per share, and most profitability ratios.
Key takeaways
- Net income = Revenue minus every expense category, including interest and taxes, not just cost of goods sold.
- It's different from gross profit and operating income, which stop before certain deductions are applied.
- REITs like Realty Income report net income separately from funds from operations (FFO), and the two can diverge sharply.
- Divide net income by revenue to get net profit margin, the number most people actually want to compare.
- Rising net income alongside a shrinking working capital formula result is an early warning sign, not a good one.
What Is the Net Income Formula?
The net income formula is Net Income = Total Revenue - Total Expenses. Expenses here mean cost of goods sold, operating costs, interest on debt, depreciation, and taxes. Whatever survives that subtraction is the real profit, the figure this business concepts guide treats as more trustworthy than any headline revenue number.
Net income also underpins residual income, a related but stricter metric. Residual income measures what's left after a company also covers its cost of capital, the minimum return investors expect. A business can post healthy net income and still show negative residual income if it never clears that bar.
The profit formula concept works the same way at every level of a business: strip out costs layer by layer, and whatever survives at the very end is the number that matters for taxes, dividends, and reinvestment decisions.
Net Income Formula Explained
Break the formula into its layers and it reads like a waterfall. Start with revenue, subtract cost of goods sold to get gross profit, subtract operating expenses to get operating income, then subtract interest and taxes to land on net income.
Don't confuse net income with fixed income. Net income is a profitability result on the income statement. Fixed income is an asset class, bonds and similar securities that pay a set interest rate over time. A company's net income can fund a fixed income portfolio, but the two terms describe entirely different things.
Net income also sits downstream from the break-even formula: break-even units = fixed costs / (price per unit - variable cost per unit). Hitting break-even means revenue finally covers costs, but net income only turns positive once volume climbs further past that point and clears interest and taxes too.
Net income alone doesn't tell you if a company can pay its bills next month. Pair it with the working capital formula, current assets minus current liabilities, to check whether paper profit matches actual cash on hand. A current ratio below 1.0 signals negative working capital, a red flag lenders check before extending credit.
A firm can report solid net income while working capital turns negative if unpaid invoices pile up faster than cash comes in the door. That gap is exactly why credit analysts never look at net income in isolation.
| Metric | Formula | What it excludes | Best used for |
|---|---|---|---|
| Gross profit | Revenue - COGS | Operating expenses, interest, taxes | Production efficiency |
| Operating income | Gross profit - operating expenses | Interest, taxes | Core business performance |
| Net income | Operating income - interest - taxes | Nothing, it's the bottom line | Overall profitability, EPS |
| Residual income | Net income - (cost of capital x equity) | Nothing, but adds a capital charge | Value creation above investor expectations |
Net Income Formula Examples
Say a small consulting firm brings in $500,000 in revenue. Cost of services runs $180,000, operating expenses $120,000, interest $10,000, and taxes $47,000. Net income = $500,000 - $180,000 - $120,000 - $10,000 - $47,000 = $143,000. Here is the same calculation as the income statement waterfall, with the margin at each step:
| Line | Amount | % of revenue |
|---|---|---|
| Revenue | $500,000 | 100% |
| - Cost of services (COGS) | $180,000 | |
| = Gross profit | $320,000 | 64% |
| - Operating expenses | $120,000 | |
| = Operating income | $200,000 | 40% |
| - Interest | $10,000 | |
| = Pre-tax income | $190,000 | 38% |
| - Taxes (about 24.7% of pre-tax income) | $47,000 | |
| = Net income | $143,000 | 28.6% |
To run your own numbers without a spreadsheet, the profit margin calculator returns gross, operating and net margin from the same inputs, and the profit and loss statement examples show where each line comes from on a real P&L.
Take a smaller product line: a $50 item with $30 variable cost and $40,000 in fixed costs. The break even formula gives 40,000 / (50 - 30) = 2,000 units. Selling 2,050 units clears break-even by 50 units, which is only 50 x $20 = $1,000 of operating profit before interest and taxes eat into it. Selling 2,500 units gives $10,000. Try your own price and cost mix in the break-even point calculator.
Real estate investment trusts complicate the picture. Realty Income Corporation, nicknamed "The Monthly Dividend Company," has been a constituent of the S&P 500 since November 2023. It discloses GAAP net income in every 10-K, but real estate depreciation and straight-line rent adjustments mean net income can look very different from the funds-from-operations figure REIT investors actually watch.
That gap is why REIT analysts almost never value a property company on net income alone.
How to Calculate Net Income Step by Step
Start with your income statement, or for a sole proprietor, the income section of Schedule C. Total every dollar of revenue for the period, then subtract cost of goods sold (a service business with no inventory may have little or none).
Next subtract operating expenses: rent, salaries, utilities, marketing. Then subtract interest on any debt and finally taxes owed. What's left is net income, whether you're a Fortune 500 company or a freelancer filing a Schedule C.
As of September 2026, IRS Schedule C instructions for Form 1040 generally require sole proprietors to report net profit, not gross receipts, on line 31, according to IRS.gov, because gross receipts alone overstate taxable income.
Finally, divide net income by revenue to get net profit margin: $143,000 / $500,000 = 28.6% in the example above. That percentage is what lets you compare this year with last year, or your business with a competitor twice your size.
Before you sign off on any net income figure, run one more check against liquidity. Compare it with the balance sheet: the balance sheet examples show how current assets and current liabilities give you working capital, and whether the profit is actually sitting in the bank.
Net income tells you if you made money. Working capital tells you if you can still pay rent next month. Never trust one without checking the other.
Net Income Formula - FAQ
How do I calculate net profit margin from net income?
Net profit margin = net income / revenue x 100. A business with $143,000 of net income on $500,000 of revenue has a 28.6% net margin. The profit margin calculator does this for gross, operating and net margin at once.
Can net income be negative?
Yes. When total expenses, including interest and taxes, exceed revenue, the result is a net loss. A business below its break-even volume will usually show one; the break-even point calculator shows how many units it takes to get back above zero.
What's the difference between the income statement and balance sheet?
The income statement shows net income over a period, revenue minus expenses. The balance sheet shows what a company owns and owes at a single point in time, including the working capital position that net income alone won't reveal.
Is net income the same as cash flow?
No. Net income includes non-cash items like depreciation and can be affected by unpaid invoices, so a company can report positive net income while actual cash flow is negative.
Why do REITs report net income and FFO separately?
Real estate depreciation distorts net income for property companies, so REITs add back depreciation and adjust for property sales to calculate funds from operations, a cleaner measure of cash-generating ability.