How to Estimate Gross and Net Earnings
Estimating your gross and net earnings for the year can help you plan for your taxes, determine whether you need to work longer hours or gain more clients and plan for the future. Your net earnings are calculated by subtracting your taxes and other expenses. In other words, gross earnings are the total earnings you make, while net earnings are your profits.
If you've been in business for several years, try reviewing earning statements from previous years. If your earnings have been about the same each year, they'll likely be the same this year. Your gross earnings may also go up or down by a certain percentage each year, so if you find such a pattern, try applying this pattern to your current year's earnings to come up with a rough estimate.
Estimation by Averages
If you're not sure how much you'll make this year, try examining how much you've already made. Add up your earnings for every month so far, then divide by the total number of months to arrive at an average. Multiply this number by twelve. If you have new business coming your way or are losing clients, be sure to add or subtract the earnings or losses from these clients to the total average.
If you've just started a business, calculating gross earnings can be challenging. Try looking at industry averages for first-year businesses. If you've already gotten a client or two, it may be best to underestimate your earnings so you don't overspend. Try calculating the total amount of money you've made from those clients in a month and then multiplying by 12 to arrive at a conservative estimate of earnings.
After you've calculated your gross earnings, you'll need to figure out your net earnings. First, tally up all business-related expenses such as rent, employee salaries, professional fees, supplies and furniture. Deduct these tax-deductible expenses from your gross earnings to arrive at your taxable income, and then determine your tax bracket by reviewing the IRS's tax bracket guide for the current tax year. Multiply your taxable income by this percentage and subtract that number from your taxable income to arrive at your net earnings.
Van Thompson is an attorney and writer. A former martial arts instructor, he holds bachelor's degrees in music and computer science from Westchester University, and a juris doctor from Georgia State University. He is the recipient of numerous writing awards, including a 2009 CALI Legal Writing Award.