Ever wonder why strong sales don’t always lead to strong profits? Knowing the difference between gross and net income isn’t just an accounting move. It’s a game-changer for business owners preparing for 2025 tax season.
If you're serious about improving your gross profit, managing expenses smartly, and boosting your bottom line, you need to understand exactly how to calculate gross vs. net income the right way.
In this article, you’ll learn how to break down gross and net numbers, avoid costly mistakes, and make smarter financial decisions for your business.
What Is Gross Income and Why Does It Matter for Your Business?
Gross income is the total revenue a business generates from goods and services sold, minus the cost of goods sold (COGS). It’s often referred to as gross because it’s the earnings before you touch operating expenses, taxes, or overhead like marketing costs or utility bills. Gross income gives you a clear look at your business’s production and labor costs compared to the sales revenue, a first snapshot of your company’s profit potential.
How can you calculate your gross income accurately?
To get an accurate view of your business performance, you’ll need to calculate gross income correctly. Here's how:
- Add up every dollar from your sources of income: sales, rental income, dividends, even additional income.
- Subtract only the direct costs: meaning raw materials, labor costs, and cost of making the products or delivering the services.
Formula to find gross income:
Gross Income = Total Revenue – Cost of Goods Sold
You do not include administrative expenses, salary for office staff, or marketing costs here. That comes later when you work out your net income.
What’s an example of finding gross income for a small business?
Example for small business owners:
- Gross Revenue (Total Revenue): $520,000
- Cost of Goods Sold (COGS): $300,000
Gross Income = $520,000 – $300,000 = $220,000
This $220,000 shows how much your business generates from core activities before tackling overhead.
If you’re setting prices or analyzing your gross profit margin, understanding your gross income and net income separately is non-negotiable.
Further Reading: Learn how to calculate and understand adjusted gross income (AGI)
How Is Net Income Different from Gross Income?
Net income is the actual profit left after you deduct all business expenses, not just the COGS, but also operating costs like rent, utilities, payroll, salary, and taxes.
This is why net income is vital, it tells you the overall profitability of a business and how efficient your business operations are.
Formula to calculate net income:
Net Income = Gross Income – Total Business Expenses
When you see net earnings on a profit and loss statement, that’s the real scorecard showing how well a company makes money.
Is net income the amount you’re taxed on for 2025 tax filings?
Absolutely.
The IRS looks at your net income (not your gross income) to determine your tax bill. Whether you're filing as a sole proprietor using Schedule C or as a corporation using Form 1120, it's net earnings that count.
Important to know:
- If your net income is positive, you're profitable and taxed accordingly.
- If you post a net loss, you might reduce your taxable income, useful for smart business decisions.
Can you see an example of net income calculation for 2025?
Let’s walk it through:
- Gross Income: $400,000
- Total Business Expenses (including operating, taxes, admin): $225,000
Net Income = $400,000 – $225,000 = $175,000
This $175,000 is what matters for your tax return, planning investments, and measuring return on investment. Income reveals how well a business converts sales into real profits.
What’s the major difference between gross income and net income?
Here's the clearest split:
- Gross income: Revenue minus direct costs tied to producing your product or service.
- Net income: Gross profit after taking out business expenses, taxes, rent, and salaries.
If you want to know the difference between gross vs net, just remember: gross measures sales health, net measures business survival.
Why is understanding gross vs. net crucial for making business decisions?
When you look at gross earnings, you're evaluating how well your company generates total revenue from your primary business activities.
When you look at net profit, you’re answering the harder question: "After everything’s paid, how much profit do we actually keep?"
Use gross income to:
- Optimize production costs.
- Price your products or services correctly.
Use net income to:
- Plan hiring.
- Pay down debt.
- Expand your business.
It’s important to know: When it comes to true profitability, net income is what really counts.
How does each impact your financial statements differently?
- Gross income sits high on the income statement and shows pure earning potential.
- Net profit (or net loss) is the figure investors, banks, and the IRS look at to assess business's financial health.
Gross tells you if your products or services are selling. Net tells you if your business’s earnings are enough to survive and grow.
Further Reading: Learn how to calculate net sales
How Do Gross and Net Income Affect Business Accounting and Tax Filing for 2025?
Tracking gross revenue accurately is the foundation of good accounting advice.
You must:
- Separate direct costs (like raw materials and labor costs) from business expenses.
- Include the cost of making products but leave out marketing, admin, and office utility bills.
If you skip this step, your profit and loss statement won't match reality, and the IRS may come knocking if your numbers don’t add up.
How should net income be reported for tax purposes?
For 2025, here’s what you need to know:
- Sole Proprietor or LLC: Report net income on Schedule C.
- S Corporation: Report using Form 1120S.
- C Corporation: File on Form 1120.
Your net income determines what you owe Uncle Sam, what deductions you can claim, and how lenders size up your business’s financial health.
What common mistakes do business owners make with gross vs. net income reporting?
Don’t fall into these traps:
- Mixing business and personal expenses (e.g., deducting your personal Costco runs as business).
- Forgetting to report additional income streams like passive earnings or interest.
- Misclassifying costs — listing marketing costs or rent under COGS instead of operating expenses.
In 2025, if you misreport or file late, the IRS can slap you with penalties starting at $435 or up to 5% of your unpaid tax per month. (IRS Penalties)
Further Reading: Learn how to calculate and use net income in business
Final Thoughts: Why Knowing Gross vs. Net Income Can Make or Break Your Business
Understanding the key differences between gross and net income isn't just accounting trivia. It’s the core of smart business decisions, strong financial health, and staying on the IRS’s good side.
Gross income tells you how much revenue you’re making from selling your products or services. Net income shows the actual profit you keep after paying the real costs of running your business.
If you want to assess how well your company’s doing, price smarter, file taxes correctly, and grow your bottom line, you need to calculate gross and calculate net accurately, every time.
Knowing the difference between gross vs. net income isn’t optional. It’s how you protect and grow your business’s future.
How can Taxfyle help?
Finding an accountant to manage your bookkeeping and file taxes is a big decision. Luckily, you don't have to handle the search on your own.
At Taxfyle, we connect small businesses with licensed, experienced CPAs or EAs in the US. We handle the hard part of finding the right tax professional by matching you with a Pro who has the right experience to meet your unique needs and will manage your bookkeeping and file taxes for you.
