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Last reviewed: September 25, 2026
Gross income is everything you earn before expenses, deductions, and taxes; net income is what's left after them. For a W-2 employee that is gross pay versus take-home pay. For a freelancer or single-member LLC owner, gross income is Schedule C line 7 (sales minus returns and cost of goods sold), and net income is Schedule C line 31, the net profit after business expenses. Both income tax and self-employment tax start from the net number, not the gross one.
The definitions are the same for 2025 returns (filed in 2026) and 2026 returns. What changed are the dollar amounts around them: the standard deduction, the 1099-NEC threshold, and the Social Security wage base.
Key takeaways:
| Figure | Where it appears | What it drives |
|---|---|---|
| Gross receipts | Schedule C, line 1 | Matching against Forms 1099-NEC and 1099-K |
| Gross income | Schedule C, line 7 | Starting point before business expenses |
| Net profit (net income) | Schedule C, line 31 | Income tax, QBI deduction, mortgage underwriting, Marketplace health subsidies |
| Net earnings from self-employment | Schedule SE, line 4a (net profit × 92.35%) | Self-employment tax of 15.3%; none owed below $400 |
| Adjusted gross income (AGI) | Form 1040, line 11a (2025 form) | EITC, IRA deduction limits, premium tax credit, student loan interest deduction |
Key numbers by tax year:
| Number | 2025 returns | 2026 returns |
|---|---|---|
| Standard deduction, single | $15,750 | $16,100 |
| 1099-NEC reporting threshold | $600 | $2,000 |
| 1099-K reporting threshold | $20,000 and 200+ transactions | $20,000 and 200+ transactions |
| Social Security wage base (12.4% part of SE tax) | $176,100 | $184,500 |
| QBI deduction | 20% of qualified business income | 20% (made permanent by the One Big Beautiful Bill Act) |
Sources: Rev. Proc. 2025-32 (IR-2025-103), SSA, IRS Form 1099-K guidance.
Save this cheat sheet: the gross-to-net path in one image.
IRC §61 is remarkably broad: "Except as otherwise provided in this subtitle, gross income means all income from whatever source derived."
This includes:
For a self-employed person, gross income starts with your gross receipts — every dollar a client pays you before any expenses are subtracted.
Self-employed gross income is calculated at the top of Schedule C, before any business expense appears:
| Schedule C line | What goes there | Example |
|---|---|---|
| Line 1 | Gross receipts or sales | $120,000 |
| Line 2 | Returns and allowances | −$2,000 |
| Line 3 | Line 1 minus line 2 | $118,000 |
| Line 4 | Cost of goods sold (if applicable) | −$0 |
| Line 5 | Gross profit (line 3 minus line 4) | $118,000 |
| Line 6 | Other income (such as fuel tax credit refunds) | $0 |
| Line 7 | Gross income (line 5 plus line 6) | $118,000 |
If you're a service-based freelancer (designer, writer, consultant, developer), you typically have no cost of goods sold. Your gross receipts equal your gross income.
If you sell physical products — on Etsy, Amazon, or from your own store — cost of goods sold (materials, manufacturing, shipping) reduces your gross receipts to arrive at gross income.
Every payment you receive for business services or products counts:
Legal citation: IRC §61(a) lists 14 categories of gross income (the 2017 Tax Cuts and Jobs Act removed alimony from the list). The 1099-NEC reporting threshold rises from $600 to $2,000 for payments made in 2026 under the One Big Beautiful Bill Act.
Gross income − business expenses = net income (net profit).
For self-employed individuals, net income is the number on Schedule C, Line 31. This is your net profit (or net loss), and it's the figure that determines almost everything on your tax return.
Here's where the gap between gross and net income becomes real. Deductible business expenses include:
| Category | Examples | Schedule C Line |
|---|---|---|
| Advertising | Facebook ads, Google ads, business cards | Line 8 |
| Car/truck | Business mileage at 70¢/mile for 2025; 72.5¢ (Jan–Jun) and 76¢ (Jul–Dec) for 2026 | Line 9 |
| Contract labor | Subcontractors, freelancers you hire | Line 11 |
| Depreciation and Section 179 | Computers, cameras, equipment | Line 13 |
| Insurance | Business liability, E&O, professional | Line 15 |
| Office expenses | Software subscriptions, supplies | Line 18 |
| Rent | Office space, coworking membership | Line 20b |
| Utilities | Internet, phone (business portion) | Line 25 |
| Home office | Dedicated workspace deduction | Line 30 |
For a detailed breakdown of every deductible category, see the Business Expense Categories guide.
| Item | Amount |
|---|---|
| Gross receipts (client payments) | $95,000 |
| Cost of goods sold | $0 |
| Gross income | $95,000 |
| Software subscriptions | −$3,600 |
| Home office deduction | −$4,200 |
| Internet (business portion) | −$960 |
| Professional development | −$1,500 |
| Business travel | −$2,800 |
| Advertising | −$1,200 |
| Computer equipment (Section 179) | −$2,400 |
| Professional liability insurance | −$800 |
| Total expenses | −$17,460 |
| Net income (Schedule C, line 31) | $77,540 |
That $77,540 is what gets taxed, not the $95,000. The $17,460 of deductions saved this developer about $2,467 in self-employment tax alone ($17,460 × 92.35% × 15.3%), plus the income tax savings.
Track expenses accurately from day one. Use the Schedule C Instructions guide for line-by-line help.
Self-employment tax is based on net income, never on gross receipts. The exact base is net earnings from self-employment: your Schedule C net profit multiplied by 92.35%, entered on Schedule SE, line 4a. The 7.65% haircut stands in for the employer half of Social Security and Medicare that a W-2 employer would pay before your wages are counted.
If net earnings from self-employment come to less than $400 (Schedule SE, line 4c), you owe no self-employment tax. Above that, 12.4% Social Security tax applies up to the wage base ($176,100 for 2025, $184,500 for 2026) and 2.9% Medicare tax applies to all of it, plus a 0.9% Additional Medicare Tax above $200,000 for single filers. The Social Security Administration also uses net earnings from self-employment to credit your earnings record.
For the web developer above, the same business produces three different "net" figures:
| Figure | Amount | Where it goes |
|---|---|---|
| Net profit (Schedule C, line 31) | $77,540 | Income tax, QBI deduction, lenders |
| Net earnings from self-employment ($77,540 × 92.35%) | $71,608 | Schedule SE, line 4a |
| Self-employment tax (15.3%) | $10,956 | Schedule SE, line 12, then Schedule 2, line 4 |
| Deductible half of SE tax | $5,478 | Schedule 1, line 15 (lowers AGI) |
The Schedule SE instructions guide walks through every line, and the self-employment tax calculator runs these numbers for your own net profit.
Adjusted gross income is not the same as gross income. AGI is your total income from every source (Schedule C net profit, W-2 wages, interest, dividends) minus a short list of above-the-line adjustments. It sits between gross income and taxable income, appears on Form 1040 (line 11a on the 2025 form, line 11 on earlier years), and is defined by IRC §62. The adjusted gross income guide covers every adjustment in detail.
These deductions reduce your AGI directly, regardless of whether you itemize:
| Deduction | Amount/Rule |
|---|---|
| 1/2 of self-employment tax | Schedule SE, line 13 → Schedule 1, line 15 |
| Self-employed health insurance | 100% of premiums (if not eligible for an employer plan); see the self-employed health insurance deduction guide |
| SEP-IRA / Solo 401(k) contributions | Total cap $70,000 (2025) / $72,000 (2026); Solo 401(k) employee deferral $23,500 (2025) / $24,500 (2026) counts toward it |
| Student loan interest | Up to $2,500 (income limits apply) |
| HSA contributions | $4,300 self / $8,550 family (2025); $4,400 / $8,750 (2026) |
| Item | Amount |
|---|---|
| Schedule C net profit | $85,000 |
| Interest income | +$500 |
| Total income | $85,500 |
| Half of SE tax ($85,000 × 92.35% × 15.3% = $12,010; half = $6,005) | −$6,005 |
| Self-employed health insurance | −$7,200 |
| SEP-IRA contribution (20% of $85,000 − $6,005) | −$15,799 |
| AGI | $56,496 |
Starting from $85,000 in net income, this consultant's AGI dropped to $56,496. AGI (or a modified version of it) is the number used to determine:
Use the Income Tax Calculator to estimate your AGI and see how deductions affect your bottom line.
After calculating AGI, you subtract either the standard deduction or itemized deductions, then the QBI deduction, to arrive at taxable income: the number your income tax is actually calculated on.
| Step (2026, single) | Amount |
|---|---|
| AGI | $56,496 |
| Standard deduction | −$16,100 |
| Taxable income before QBI | $40,396 |
| QBI deduction | −$8,079 |
| Taxable income | $32,317 |
The QBI deduction is the smaller of two amounts: 20% of qualified business income ($85,000 net profit minus the $6,005 SE tax deduction, $7,200 health insurance, and $15,799 SEP contribution = $55,996; 20% = $11,199) or 20% of taxable income before QBI ($40,396 × 20% = $8,079). Here the taxable-income cap wins, which is common once retirement contributions and the standard deduction have already shrunk taxable income.
2026 income tax on $32,317 (single):
| Bracket | Tax |
|---|---|
| 10% on the first $12,400 | $1,240 |
| 12% on $12,400–$32,317 ($19,917) | $2,390 |
| Total income tax | $3,630 |
Self-employment tax is the bigger bill here. The consultant owes $12,010 of SE tax against $3,630 of income tax, for $15,640 in total federal tax. Income tax shrinks with every deduction between AGI and taxable income; SE tax only shrinks when Schedule C net profit does, which is why business expenses are worth more to a freelancer than the SEP contribution or the standard deduction.
Use the Effective Tax Rate Calculator to see your combined federal tax burden — including both income tax and self-employment tax.
Lenders qualify self-employed borrowers on net profit, not gross receipts, and then add back some non-cash deductions. Fannie Mae's Selling Guide (B3-3.6-03) starts from Schedule C net profit, adds back depreciation, depletion, business use of home, amortization, and casualty losses, and deducts non-recurring income. For the web developer above, that means $77,540 + $2,400 (Section 179 depreciation, line 13) + $4,200 (home office, line 30) = $84,140 of qualifying income for the year.
At Anna Money, which served 60,000+ UK small businesses, we saw loan applications fall apart for exactly this reason: the lender asked for net income and the owner only knew revenue.
This creates a tension for self-employed borrowers: you want to minimize net income for tax purposes (more deductions = less tax), but you need to show sufficient net income for loan qualification.
What lenders typically review:
Landlords usually want to see that your gross income (or sometimes AGI) is 2.5–3× the monthly rent. As a freelancer, be prepared to provide:
Some insurance programs, marketplace health plans, and government benefits use AGI or Modified AGI (MAGI) to determine eligibility and pricing. The lower your AGI, the more subsidies you may qualify for.
On a HealthCare.gov application, self-employed people report net self-employment income, meaning profit after business expenses, not gross receipts. Reporting gross overstates your income and shrinks the premium tax credit you're offered.
Beyond your personal tax return, understanding margins helps you evaluate your business health. The gross profit vs net profit guide covers the business-accounting side in more depth.
Gross margin = (gross income − COGS) ÷ gross income × 100
For service-based freelancers with no cost of goods sold, gross margin is essentially 100%. For product sellers:
| Item | Amount |
|---|---|
| Revenue | $50,000 |
| COGS | $15,000 |
| Gross profit | $35,000 |
| Gross margin | 70% |
Net margin = net income ÷ gross income × 100
This tells you what percentage of every dollar earned you actually keep. For the web developer: $77,540 ÷ $95,000 = 81.6% net margin.
Healthy net margins for freelancers typically range from 60–85%, depending on the industry. If your net margin is below 50%, examine your expenses — you may be spending too much relative to revenue, or you may need to raise your rates.
| Business Type | Typical Net Margin |
|---|---|
| Freelance consulting | 70–85% |
| Freelance design/development | 65–80% |
| E-commerce (physical products) | 15–30% |
| Content creation | 60–75% |
| Rideshare/delivery | 40–55% |
Here's where gross income, net income, and AGI appear on the 2025 forms (filed in 2026):
| Step | Form and line | Figure |
|---|---|---|
| 1 | Schedule C, line 1 | Gross receipts (client payments, 1099-NEC and 1099-K income) |
| 2 | Schedule C, line 7 | Gross income (after returns and cost of goods sold) |
| 3 | Schedule C, line 31 | Net profit (net income) |
| 4 | Schedule SE, lines 4a and 12 | Net earnings from self-employment → SE tax (to Schedule 2, line 4) |
| 5 | Schedule 1, line 3 → Form 1040, line 8 | Business income joins other income |
| 6 | Form 1040, line 9 | Total income (adds W-2 wages, interest, dividends) |
| 7 | Form 1040, line 10 (from Schedule 1, line 26) | Adjustments: half of SE tax, SE health insurance, SEP or Solo 401(k) |
| 8 | Form 1040, line 11a | Adjusted gross income |
| 9 | Form 1040, lines 12e, 13a, 13b | Standard or itemized deduction, QBI deduction, Schedule 1-A deductions |
| 10 | Form 1040, line 15 | Taxable income |
| 11 | Form 1040, line 16 | Income tax |
Income tax plus SE tax (and any other taxes on Schedule 2) is your total federal tax liability. Each step reduces the number, and every legitimate deduction between gross and taxable income saves you money.
Telling your accountant (or the IRS) that you "made $100,000" when your net profit was $65,000 creates problems. Revenue is not profit. Always know both numbers.
If you don't track business expenses, your Schedule C shows a higher net profit than reality. This means you pay more self-employment tax (15.3%) and more income tax. For someone in the 22% bracket, every $1,000 in missed deductions costs roughly $305 in combined federal tax: about $141 of SE tax ($1,000 × 92.35% × 15.3%) plus about $164 of income tax after the SE tax and QBI deductions.
Loan applications, benefit eligibility, and tax credit calculations each require specific income figures. HealthCare.gov wants net self-employment income, mortgage underwriters start from Schedule C line 31, and a 1099-K reports gross payments before fees and refunds. Using the wrong number can result in denied applications or incorrectly claimed credits. Know which number is being asked for.
Your Schedule C net profit feeds into AGI, but AGI includes income from all sources and subtracts above-the-line deductions. If you have a spouse with W-2 income, investment income, or retirement contributions, your AGI will differ significantly from your business net income.
The difference between gross and net income is the amount you can deduct. Every dollar of legitimate business expense reduces your tax bill. Failing to claim deductions doesn't make you conservative — it makes you overpay.
Net income is only as accurate as your expense records, and missed expenses are where most freelancers overpay. Jupid is an AI accountant you message in WhatsApp or iMessage. Connect your business bank account and it categorizes every transaction at 95.9% accuracy, separating deductible expenses from personal spending as they come in, so gross receipts and Schedule C expenses are already sorted when you file. Ask "what's my net profit so far this year?" or "how much did I spend on software in Q2?" and get the answer from your own transactions. Try Jupid.
Gross income tells you how much your business brought in. Net income tells you how much you kept. AGI decides which credits and deductions you qualify for. Every self-employed worker needs to know all three and understand exactly how expenses, deductions, and credits transform one number into the next.
Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax laws change frequently. Consult a qualified tax professional for advice specific to your situation. Jupid provides AI-powered bookkeeping and tax assistance but is not a substitute for professional tax counsel.
CEO & Co-Founder
Fintech CEO with 10+ years building accounting and financial technology products. Previously co-founded and scaled an AI-powered accounting platform to $30M revenue and 100K+ business users, achieving 30,000 customers per accountant through automation — recognized by CNBC as a top fintech company. Holds a Master's in Management Information Systems. At Jupid, he leads the development of AI-native bookkeeping, tax, and compliance tools designed for freelancers and small business owners.
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