I am writing an independent contractor agreement for a business law class project and i need to state that the independent contractor get a percentage of net income as an incentive for the independent contractor to work harder and produce more profit for the company. The wrinkle is that i need to define net income in accordance with accounting standards rules and regulations and I can not find this. Can someone point me in the proper direction as to were i can find the proper definition of net income?

I would use a definition of net income that is consistent with Generally Accepted Accounting Principals ("GAAP": "Net income is the residual income of a firm after adding total revenue and gains and subtracting all expenses and losses for the reporting period."

Or define net income as an equation such as:

An equation for net income

Net sales revenue
– Cost of goods sold
= Gross profit
– SG&A expenses (combined costs of operating the company)
= EBITDA
– Depreciation & amortization
= EBIT
– Interest expense (cost of borrowing money)
= EBT
– Tax expense
= Net income (EAT)

Is the GAAP definition of net income different than what court cases say net income is? For example, i've seen situations where depreciation and amortization are not part of the calculation of net income.

Hello Tomas,

USLegal.com's definition of net income is an individual's or company's profit after taking into consideration all other expenses and income and taxes. Net income is equal to the income, minus the expenses, of a business. It's also called profit or net profit. Net income is the bottom line of the income statement.

In trusts and estates, distributable net income is the tax concept used to allocate taxable income between the trust or estate and the beneficiaries. Distributable net income is an approximation of the actual economic benefit available to the income beneficiaries.

As such, GAAP's definition of net income and the legal definition of the said term are the same, since depreciation and amortization are technically considered as expenses under both.

Hope this helps.


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