Invoicing

Gross Profit vs Net Profit: What’s the Difference?

6 min readUpdated August 10, 2026

Gross profit and net profit both answer "did we make money," but at different levels — gross profit looks at whether the work itself was profitable, and net profit looks at whether the whole business was, after everything else is accounted for.

Gross profit

Gross profit is revenue minus the direct cost of delivering the work or product — materials, subcontractors, direct labor tied to the job. The formula is simple: Revenue − Cost of Goods Sold (COGS) = Gross Profit. It tells you whether the core work itself is priced profitably, before overhead is factored in.

Net profit

Net profit takes gross profit and subtracts everything else — rent, software subscriptions, admin time, marketing, taxes, and every other operating cost. The formula: Gross Profit − Operating Expenses − Taxes = Net Profit. It’s the real bottom line: what’s actually left after running the entire business, not just delivering one job.

A worked example

A freelancer bills $10,000 for a project, spending $2,000 on a subcontractor to help deliver it. Gross profit is $8,000 ($10,000 − $2,000), a healthy 80% gross margin. But after $3,000 in monthly overhead (software, a portion of rent, admin time) allocated to that period, net profit drops to $5,000 — still solid, but a very different number from the gross figure.

Why the difference matters

A high gross margin with a low net margin usually means overhead is eating your profitability — worth investigating what’s driving fixed costs. A low gross margin means the core pricing or delivery cost of the work itself is the problem, and no amount of cutting overhead will fully fix it; the pricing needs to change.

FAQ

What’s a good gross margin for a service business?

It varies widely by industry, but many service businesses with light direct costs (little to no materials or subcontracting) run gross margins of 70% or higher. Businesses with significant subcontractor or material costs run lower.

Can gross profit be positive while net profit is negative?

Yes, and it’s a common warning sign — it means individual jobs are profitable on their own, but overhead costs are large enough to erase that profit at the business level. It usually points to cutting fixed costs rather than repricing individual jobs.

Which number should I use to decide if a project was worth taking?

Gross profit is the more direct answer for a single project, since it isolates the cost of delivering that specific work. Net profit matters more for evaluating the health of the business as a whole over a period.

Do freelancers need to track gross profit separately from net profit?

It’s useful even at a small scale — tracking gross profit per project shows you which types of work are genuinely most profitable, which can get hidden if you only ever look at overall net profit.

Put this into practice with a real invoice.

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