Gross vs Net Income: Business Owners
For a business, gross income and net income mean something different from personal income. Here is how the numbers work.
The business income waterfall
Revenue (Gross Revenue)
All money received from customers
Cost of Goods Sold (COGS)
Direct cost of producing your product or service
Gross Profit
Revenue minus COGS - aka Gross Income for business
Operating Expenses
Rent, salaries, marketing, software, etc.
EBITDA
Earnings before interest, tax, depreciation, amortization
Depreciation & Amortization
Non-cash expense on assets
Interest Expense
If you have business debt
Pre-Tax Income
Taxable business income
Business Taxes
Federal corporate/pass-through rate
Net Income
The bottom line - what the business actually earned
Gross Profit Margin matters
Gross profit margin (gross profit / revenue) tells you how efficiently the core business runs before overhead. Software companies often have 70-80%+ gross margins. Restaurants may have 30-40%. Retailers may be 20-30%. A falling gross margin is a warning sign even when revenue is growing.
Net Profit Margin benchmarks
Net profit margins vary wildly by industry. Software: 15-30%. Professional services: 10-20%. Retail: 2-5%. Restaurants: 3-9%. Healthcare: 3-8%. If your net margin is consistently negative, you are burning cash regardless of what revenue looks like.
Self-employed: gross vs net is your tax burden
If you are self-employed or a sole proprietor, your gross income is all the money you received. Net income is what remains after business expenses. You pay self-employment tax (15.3% on the first $168,600) plus federal and state income tax on your net income.
This is why business expenses matter so much. A $1,000 business expense saves you not just income tax but also 15.3% in self-employment tax. Track every legitimate business expense.