Net Income vs Gross Income
Quick Definition
Gross income is the total money your contracting business brings in before any expenses, while net income is what's left after you subtract all business costs — and it's what you actually pay taxes on.
What Is Net Income vs Gross Income?
Gross income (also called gross revenue or gross receipts) is the total amount your business earns before deducting anything. Every payment from every client, every completed job — that's your gross. If you completed $250,000 worth of contracting work this year, your gross income is $250,000.
Net income (also called net profit) is what remains after you subtract all your business expenses from your gross income. Materials, subcontractor payments, insurance, vehicle costs, tools, licensing fees, advertising — all of it comes out. If those expenses totaled $150,000, your net income is $100,000.
This distinction matters because nearly everything in your financial life keys off one or the other. The IRS taxes you on net income (your Schedule C bottom line). Banks may look at gross income to qualify you for a loan but net income to assess your actual ability to repay. Insurance companies might base your premiums on gross receipts. Knowing which number someone is asking for — and being able to produce both accurately — is fundamental to running a contracting business.
Why It Matters for Contractors
Contractors often focus on gross income ("I did $300K this year") without paying enough attention to net income. But if your expenses ate up $250K, you really only made $50K. Your tax bill, your ability to save for retirement, your loan eligibility — it's all based on what you keep, not what you bill.
Tracking both numbers helps you make better business decisions. If your gross is growing but your net is shrinking, your costs are outpacing your revenue — time to raise prices, cut waste, or renegotiate supplier terms.
Example
You're a roofing contractor. This year: $320,000 in gross income from completed jobs. Expenses: $95,000 in materials, $65,000 in subcontractor labor, $24,000 in vehicle costs, $18,000 in insurance, $12,000 in tools and equipment, $8,000 in advertising, and $6,000 in other costs. Total expenses: $228,000. Net income: $92,000. That $92,000 is what appears on your Schedule C, what you pay self-employment tax on, and what you can contribute to retirement accounts from.
Key Takeaways
- ✅ Gross income is total revenue; net income is what's left after expenses
- ✅ You pay income tax and self-employment tax on net income, not gross
- ✅ Banks, insurers, and bonding companies may ask for either number — know both
- ✅ If gross is growing but net is flat or shrinking, your margins are eroding
How Holdings Helps
Holdings gives you a real-time view of both your gross and net income, so you always know exactly where your contracting business stands financially.
Related Terms
Schedule C
The IRS form (Schedule C, Profit or Loss from Business) that sole proprietors and single-member LLCs use to report business income and expenses on their personal tax return.
Self-Employment Tax
A 15.3% tax that self-employed individuals pay to cover Social Security (12.4%) and Medicare (2.9%) — essentially both the employer and employee halves of payroll tax.
Cash vs Accrual Accounting
Cash accounting records income when you receive payment and expenses when you pay them, while accrual accounting records income when you earn it and expenses when you incur them — regardless of when money changes hands.
Accounts Receivable Aging
A report that categorizes your outstanding invoices by how long they've been unpaid — typically in 30-day buckets (current, 30, 60, 90, 120+ days) — showing you who owes you money and how overdue it is.
1099-NEC vs 1099-MISC
The 1099-NEC reports nonemployee compensation (what you earned as a contractor), while the 1099-MISC covers other miscellaneous income like rents, royalties, and prizes.
1099-NEC vs 1099-MISC
The 1099-NEC reports nonemployee compensation (what you earned as a contractor), while the 1099-MISC covers other miscellaneous income like rents, royalties, and prizes.
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