What are Net Earnings?

Tricia Christensen
Tricia Christensen

Net earnings are the amount a person or entity earns after certain types of allowable deductions are made. Before these deductions are made, the total amount earned is often called gross earnings. The difference between gross and net can be very important, especially when it comes to things like taxation.

Net earnings include deductions made from a person's gross wages.
Net earnings include deductions made from a person's gross wages.

The individual who works a steady job will usually notice that paychecks have listings for gross and net earnings. The gross earnings can look much higher, but whatever deductions are taken from the paycheck reduces them. Some standard deductions taken from paychecks include those for state, federal or municipal taxes.

In places like the United States, people pay social security and Medicare payments, and in other countries, they might pay for national health care or pay country taxes. Investments at the company level in benefits like retirement plans, health and/or life insurance, or any other program considered tax deductible may reduce the income as well. What are left are net earnings.

As the year progresses, individuals have an increasing amount of net earnings, and when they complete tax forms at the end of the year, they’ll usually have to fill out what they netted, instead of what they grossed. This may vary by country, so it’s important to be familiar with home country tax laws.

If a taxpayer has more than one job, when tax forms ask for a report of net earnings, earnings from all jobs have to be totaled. In addition to that, earnings from things like investments may also be considered part of the net. It should be noted that people should still keep track of gross earnings, too, as applications for credit, rentals, etc, may require people to report gross amounts instead of net amounts.

A slightly different format may be used when net earnings are discussed in the business context. One variant occurs in sales, where net sales are the amount earned that is reduced by the amount of returns of sales items, so that an accurate count is reached. In other businesses, net earnings become the money made after allowable deductions are taken.

These could include business taxes, but they can also include a variety of business expenses. In other words, all the costs to run the business could be subtracted from gross receipts to determine net or profit. Whenever a company makes more than it spends or owes, it’s said to be running "in the black."

What are determined as net earnings will always depend on the context in which the term is used. Basically, it is gross earnings where allowable deductions, defined in different ways, are subtracted. This leaves the amount that employees or companies are said to net.

Tricia Christensen
Tricia Christensen

Tricia has a Literature degree from Sonoma State University and has been a frequent wiseGEEK contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.

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