Are you working as a freelancer? Whether you’re fixing roofs, painting houses, consulting, or juggling multiple gigs, it’s important to understand how much money you’re actually taking home. Sure, it might feel great to land a big client or send out a hefty invoice—but not all of that money is yours to keep.
That’s where net income comes in. Knowing your net income helps you see the full picture of your finances, from what you’re earning to what you’re spending. This guide will walk you through exactly how to calculate it—in simple, clear steps that make it easy to follow, even if you’re not a numbers person.
Gross Income Versus Net Income
Let’s clear up the difference between these two:
- Gross Income is ALL the money you make before any expenses are taken out. It’s the total amount clients pay you.
- Net Income is what’s left after you subtract all expenses, costs, and taxes. This is the money you actually get to keep.
The difference between these two numbers can be pretty big for freelancers because you have to pay for so many business expenses yourself.
For example, imagine you’re a freelance web designer who charged $5,000 to build a website for a client.
That $5,000 is your gross income for this project. But to complete the project, you paid $200 for premium website templates, $100 for stock photos, $50 for a specialized plugin, and $150 for online advertising to find the client. You also spent $500 on your monthly software subscriptions, internet, and phone bill while working on the project.
Plus, you need to set aside about $1,000 for taxes. After subtracting all these costs ($2,000 total) from your $5,000 gross income, your net income would be $3,000. So while your client paid you $5,000, you actually get to keep $3,000 as your profit.
This is why understanding the difference between gross and net income is so important – that $5,000 might look great at first glance, but your actual earnings are significantly less.
For a deeper understanding of this difference, check out our guide: Gross Profit vs. Net Profit: What’s the Difference?
Components of the Net Income Formula
To figure out your net income, you need to understand what goes into the calculation. Understanding these parts is like knowing how a ledger balance works in accounting—it gives you the full picture of your money situation.
1. Revenue
Revenue is all the money you earn from your freelance work before taking out any expenses:
- Money from clients
- Consulting fees
- Royalties
- Money from affiliate links
- Any other business income
Keep good records of all money coming in – write down the date, amount, client, and what you did to earn it.
2. Cost of Goods Sold (COGS)
COGS is what you spend directly to complete client projects:
- Materials you buy for specific projects
- Money you pay other freelancers who help with your projects
- Production costs if you sell physical items
- Software or services you buy just for one client
If you mostly provide services, your COGS might be small, but it’s still good to track these costs separately.
3. Total Expenses
Expenses are all the costs of running your freelance business:
3.1 Operating Expenses:
These are your day-to-day costs:
- Home office costs (part of your rent/mortgage, utilities)
- Internet and phone bills
- Software subscriptions
- Website costs
- Office supplies
- Courses or books to improve your skills
- Money paid to accountants or lawyers
- Advertising
- Business travel
- Business meals
- Insurance
3.2 Capital Expenses
These are bigger, long-term purchases:
- Computer equipment
- Office furniture
- Camera or other special equipment
- Car (if used for business)
These big purchases usually get “depreciated” – meaning you spread the cost over several years for tax purposes.
3.3 Other Non-Operating Expenses and Taxes
Other costs that affect your net income:
- Interest on business loans
- Bank fees
- Self-employment taxes (about 15.3% for Social Security and Medicare)
- Quarterly tax payments
- State and local taxes
- Health insurance
- Retirement contributions
The Net Income Formula
Here’s the simple formula for calculating net income:
Net Income = Revenue – (Cost of Goods Sold + Total Expenses + Taxes)
This formula is a key part of your financial calculations, just like understanding your break-even point helps you know when your business becomes profitable.
The Gross Income Formula
Before figuring out net income, you’ll need to calculate your gross income:
Gross Income = Revenue – Cost of Goods Sold
This step helps you see how much you’re making before other business expenses.
How to Calculate Net Income in 3 Easy Steps
Follow these simple steps to figure out your net income:
1. Identify Revenue, Cost of Goods Sold, and Total Expenses
Gather all your financial records for the month, quarter, or year:
- Client invoices and payment records
- Receipts for all business expenses
- Bank and credit card statements
- Previous tax returns (for reference)
Group your income sources and expenses into categories to make things easier.
2. Subtract COGS and Expenses from Revenue
Once you have everything organized:
- Add up all the money you earned from freelance work and other business sources.
- Add up your cost of goods sold.
- Calculate your gross income by subtracting COGS from revenue.
- Add up all your operating expenses, capital expenses, and other expenses.
- Include your estimated taxes or actual tax payments.
3. Calculate and Verify Net Income
Use the net income formula:
Net Income = Revenue – (COGS + Total Expenses + Taxes)
After calculating your net income, double-check your work by:
- Comparing it to previous months or quarters
- Making sure you didn’t miss any expenses or income
- Making sure you included all tax considerations
Net Income Calculation Example
Let’s look at a simple example for a freelance graphic designer for one month:
1. Revenue
- Client A: $3,000
- Client B: $2,500
- Client C: $1,500
- Total Revenue: $7,000
2. Cost of Goods Sold
- Stock photos for client projects: $100
- Special font purchase for Client B: $50
- Logo work hired out to another designer: $300
- Total COGS: $450
Gross Income: $7,000 – $450 = $6,550
3. Operating Expenses
- Home office (25% of $1,200 rent): $300
- Internet and phone: $120
- Design software subscription: $55
- Website hosting: $20
- Professional membership: $25
- Advertising: $100
- Total Operating Expenses: $620
4. Other Expenses
- Computer depreciation (monthly portion): $75
- Business insurance: $50
- Health insurance: $350
- Money set aside for taxes: $1,400
- Total Other Expenses: $1,875
Net Income Calculation: $7,000 – ($450 + $620 + $1,875) = $4,055
So, in this example, the freelance graphic designer’s net income for the month is $4,055.
Recording Your Net Income
Keeping track of your net income over time is super important. You might use:
- Accounting software like QuickBooks, FreshBooks, or Wave
- Spreadsheet templates made for freelancers
- Regular money check-ups (monthly, quarterly, and yearly)
- Our Invoice Maker to properly track money from clients
Good record-keeping isn’t just important for calculating net income – it also helps you create accurate pay stubs if you need to prove your income when renting an apartment or applying for a loan.
What Does Positive Net Income Mean?
If your net income is positive, congratulations! Your business is making money. You’re earning more than you’re spending. This means you can:
- Save money
- Put money back into your business
- Pay off debt
- Pay yourself
What Does Negative Net Income Mean?
If your net income is negative (you have a net loss), you’re spending more than you’re earning. This can happen sometimes, especially when you make big investments in your business. But if it keeps happening, you might need to:
- Raise your rates
- Find more clients
- Cut unnecessary expenses
- Rethink your business approach
Understanding Your Net Income
Beyond just calculating the number, it helps to analyze your net income:
- Net Profit Margin: Divide your net income by your revenue and multiply by 100. For example, if your net income is $4,055 on $7,000 revenue, your net profit margin is 57.9%. This helps you compare how profitable you are regardless of how much you earn.
- Income Trends: Track your net income over time to see seasonal patterns or growth.
- Expense Ratio: Figure out what percentage of your revenue goes to different expense categories to see where you might be spending too much.
- Industry Benchmarks: Look up average profit margins in your industry to see how your business compares.
- Financial Projections: Once you have a solid grasp of your net income, you can use it to plan for the future. Creating projections helps you estimate income, expenses, and profit over time.
Tip! Here’s a simple, step-by-step guide on how to build your own financial projection so you can map out where your freelance business is headed.
Final Thoughts
Understanding how to calculate and keep track of your net income is super important if you want your freelance business to succeed. When you know this number, you can make better decisions about your prices, expenses, and growth opportunities.
Remember that calculating net income isn’t just about knowing where you stand financially—it’s about using that information to keep improving your business. When you understand your bottom line, you can confidently handle the ups and downs of freelance work while building long-term financial stability.
Regularly checking your net income and planning your finances will help make sure your freelance career stays both personally satisfying and financially rewarding for years to come.
FAQs about Calculating Net Income For Freelancers
It's best to check your net income monthly to stay on top of your finances. Also do quarterly reviews when you make estimated tax payments, and a yearly review when you file taxes.
No. According to the IRS, only include business expenses that are legitimate tax deductions for your freelance work. Keep your personal and business money separate.
Your net income is the basis for your self-employment income, which determines how much tax you'll pay. Higher net income means higher taxes, but it also means your business is doing better!
For most freelancers using cash-basis accounting, income only counts when you actually receive it. So if you send an invoice in December with net 30 terms, but get paid in January, that money counts toward the new year's income.
