TL;DR

Net income is what you actually keep. It's revenue minus everything: expenses, taxes, loan payments. A business might generate $200,000 in revenue but have $20,000 in net income if expenses are high. The bottom line is what matters for financial sustainability.

Key Points

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Net income = [[gross-income|Gross income]] − all expenses (operating, tax, interest, depreciation)

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Net income is the 'bottom line' of the [[profit-and-loss]] statement — the final figure after all deductions

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Positive net income means the business is profitable; negative net income is a net loss

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For sole proprietors and freelancers, net income from Schedule C flows through to personal income taxes

What Net Income Tells You

Net income is the definitive measure of profitability — it answers the question 'after paying for everything, how much did we make?'¹. For a Freelancer or Sole Proprietor, net income from business activities (calculated on Schedule C) is the amount on which you pay both self-employment tax and income tax. A business generating $150,000 in revenue with $80,000 in expenses and $20,000 in taxes keeps $50,000 as net income. Tracking net income monthly on a Profit & Loss Statement statement reveals whether your pricing is sufficient, whether expenses are under control, and whether the business is financially sustainable over the long term.

Net Income vs. Cash Flow

An important distinction: net income is an accounting metric, not a cash metric. Under Accrual Accounting, revenue is recognized when earned (when you invoice), not when received. So net income can be positive while actual cash is low if clients haven't paid. For a cash basis business, net income and cash flow are more closely aligned — revenue is only counted when received. Most small businesses use cash basis accounting precisely because it reflects actual cash. Even then, one-time expenses (a large equipment purchase) can create a period of low or negative net income that doesn't represent the business's underlying profitability. Track both net income and Cash Flow to get a complete picture.

Improving Net Income

Two levers improve net income: increasing Revenue (raising prices, acquiring more clients, selling more to existing clients) and reducing operating expenses (eliminating waste, renegotiating vendor contracts, improving operational efficiency). Price increases directly improve net income: raising your rates by 10% with the same volume of work drops almost entirely to the bottom line. Expense reductions also improve net income directly but can have operational limits. Profit margin (net income ÷ revenue) is the normalized measure that makes comparisons meaningful — a 30% net profit margin is healthy for most service businesses; below 15% for a solo freelancer should prompt pricing and expense review.

References

FreshBooks — Profit vs. Revenue ↗

freshbooks.com

IRS — Business Taxes for Self-Employed Individuals ↗

irs.gov

Last updated: June 9, 2026

Related Terms

Gross Income

The total revenue earned by a business before any deductions for expenses, taxes, or other costs. For individuals, gross income is total earnings before income taxes and deductions.

Profit Margin

A ratio expressing what percentage of revenue is retained as profit after expenses, used to evaluate the financial efficiency and health of a business.

Revenue

The total income generated by a business from its primary operations — the sale of goods or services — before any costs or expenses are deducted.

Profit & Loss Statement

A financial statement that summarizes all revenues, costs, and expenses over a specific accounting period, showing whether a business made a profit or incurred a loss.

Operating Expenses

The ongoing costs incurred in the day-to-day operation of a business, including rent, salaries, software subscriptions, marketing, and utilities, but excluding cost of goods sold and capital expenditures.

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