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Net income is the amount left after expenses and deductions are subtracted from gross income. It is important to consider when negotiating a salary or determining eligibility for social programs, loans, and credit. Both individuals and businesses calculate net income differently.
Net income can be considered in several ways. Both companies and individuals look at their net income and their gross income. Gross income is very easy to understand because it is simply everything a person or business makes, regardless of expenses or deductions. When people look at net income, they factor in deductions to arrive at a net amount.
In business, net income would be the number arrived at after certain things occur, such as paying taxes, paying employees, paying rent or building maintenance, and purchasing necessary supplies. Net income can also be considered the company’s profit or what the company is left with after all accounts are settled.
Sometimes companies talk about “making” a certain amount of money, and this refers to looking at profit or net income. This is usually a very different number than gross profit, and much lower. Theoretically, a company can make practically nothing if, after covering all expenses, they have no money left.
An individual’s net income is calculated in a slightly different way. People do not deduct their rent payments or cost of living when calculating this number. Instead, it is a simpler process.
Most people pay state and federal taxes, social security payments, and disability taxes. Some contribute money to a 401k and may be able to put some money towards health insurance payments. They can also contribute to a health savings account. All of these things come out of the paycheck by reducing gross income.
Essentially, all deductions subtracted from the gross amount become net income. This may be called a take home and can be significantly reduced from the gross amount. The consideration of what people will actually take home is very important when thinking about a salary; What remains when all taxes or wage contributions are removed? Understanding the tax code and potential contribution to other programs can help people determine how much they need to make to cover their daily expenses, and this could be an important part of salary negotiation.
The percentage of income that 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, meaning potentially lower net amounts. Another variable might be things like contributions to voluntary programs or to pay for health insurance. People can decide, most of the time, 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 number of social programs that are determined based on gross income instead of net income. People who might otherwise qualify for welfare may earn too much when gross is considered. The other side of the coin is eligibility for loans, rent, and credit, which is often determined in part by gross income, where people can make much more than they earn, and really can’t afford a loan or rent. high priced.
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