From sales to net profit, one step at a time
Net profit is what is left after every cost of the period has been paid or provided for. The order of the deductions matters, because each subtotal answers a different question. Gross profit tells you whether your prices cover what you sell. Operating profit tells you whether the business as a whole trades at a profit. Profit before tax shows the effect of how it is financed, and net profit after tax is what is available to reinvest or pay out to the owners.
Sales − cost of sales − operating expenses − depreciation − interest − tax = net profit
Operating profit, EBIT and EBITDA
Operating profit, also called EBIT, is gross profit less the costs of running the business: salaries, rent, vehicle costs, insurance, marketing and depreciation. EBITDA goes one step back and leaves depreciation and amortisation out too. Banks and anyone valuing a business often quote EBITDA because it is close to the cash the operations generate, but it flatters businesses that rely on expensive equipment. A contractor with a fleet of bakkies and a TLB has real costs in wearing them out, which is why depreciation belongs in operating profit. The depreciation calculator works out the annual charge for an asset.
Worked example: a building contractor in Gqeberha
A residential building contractor trades as a Pty Ltd owned by two brothers. For its last financial year it invoiced R3,850,000 excluding VAT. Materials, subcontractors and site labour came to R2,310,000, leaving a gross profit of R1,540,000, a gross margin of 40.0%.
Operating expenses were R830,000: office and admin salaries R540,000, office rent R84,000, vehicle running costs R96,000, insurance R38,000, accounting and legal fees R30,000, phones, software and sundries R42,000. That gives EBITDA of R710,000. Depreciation on the vehicles and plant was R72,000, so operating profit is R638,000 (16.6% of sales). Interest on the vehicle finance and overdraft was R41,000, leaving profit before tax of R597,000.
At the 27% company rate, estimated tax is R161,190 and net profit after tax is R435,810, a net margin of 11.3%. If the company qualifies as a small business corporation, the estimate drops to R70,160 (an effective rate of 11.8%) and net profit rises to R526,840.
Company tax on the profit
Companies and close corporations pay income tax at a flat 27% of taxable income for years of assessment ending on or after 31 March 2023; before that the rate was 28%. SARS lists the same rate for years of assessment ending 1 April 2026 to 31 March 2027. A company that qualifies as a small business corporation under section 12E pays graduated rates instead. Its gross income for the year may not exceed R20,000,000, all shareholders must be natural persons, and investment income and income from personal services may not make up more than 20% of its receipts. Other conditions apply, so check before you rely on the lower rates.
| Taxable income | Tax |
|---|---|
| R0 to R99,000 | 0% |
| R99,001 to R365,000 | 7% of the amount above R99,000 |
| R365,001 to R550,000 | R18,620 + 21% of the amount above R365,000 |
| R550,001 and above | R57,470 + 27% of the amount above R550,000 |
The company tax calculator covers these rates in more detail. Every company is a provisional taxpayer, so the tax estimated here is normally paid in two provisional payments during the year, with a top-up after year-end. The provisional tax calculator helps plan them.
Why taxable income differs from accounting profit
The estimate above applies the rate to profit before tax, which is a reasonable first figure but not what SARS assesses. Your accounting depreciation is replaced by the capital allowances the Income Tax Act permits, which can be faster or slower. Fines, penalties and private expenses run through the business are added back. An assessed loss carried forward from an earlier year reduces taxable income, within the limits SARS applies. Your accountant does this reconciliation on the ITR14 return.
Sole proprietors pay personal tax on the profit
A sole proprietor or partner is not taxed separately from the business. The profit is added to any salary or other income and taxed at the individual rates on the SARS tax tables. Money you draw out during the year is not an expense and does not lower the profit, so leave it out of the operating expenses above. In a Pty Ltd, a director's salary run through payroll is an expense of the company, and profit paid out as a dividend comes from after-tax profit and attracts dividends tax. The salary vs dividend calculator compares the two ways of paying yourself.
Reading your net margin
A single month's net margin can swing with an annual insurance premium or a large repair, so compare financial years or rolling twelve-month figures. If net margin falls while gross margin holds steady, overheads are growing faster than sales. If both fall together, look at pricing and supplier costs first with the gross margin calculator.
Frequently asked questions
How do I calculate net profit?
Start with sales, subtract cost of sales to get gross profit, subtract operating expenses and depreciation to get operating profit, subtract interest to get profit before tax, then subtract income tax. The contractor example on this page turns R3,850,000 of sales into R435,810 of net profit after tax at the 27% company rate.
What is a net profit margin?
Net profit as a percentage of sales. It shows how many cents of every rand of sales the business keeps after all costs. The contractor's net margin after tax is 11.3%. Compare it with your own previous years rather than with a figure from another industry.
What is the company tax rate in South Africa?
27% of taxable income for years of assessment ending on or after 31 March 2023. Before that it was 28%. The 2026 Budget left the rate unchanged. Companies that qualify as small business corporations pay lower graduated rates on the first R550,000.
Is EBIT the same as operating profit?
For most small businesses, yes. EBIT (earnings before interest and tax) is gross profit less operating expenses and depreciation. Some companies include once-off income or costs in one and not the other, but on a simple income statement the two figures match.
Is my salary as a sole proprietor an expense?
No. A sole proprietor cannot employ themselves, so money you take out of the business is drawings, not salary, and it does not reduce the profit. The whole profit is added to your personal income and taxed at individual rates. A director paid through payroll by a Pty Ltd is different: that salary is an expense of the company.
Why is my tax bill different from 27% of my profit?
Company tax is charged on taxable income, which starts from accounting profit and is then adjusted. Depreciation is swapped for the wear-and-tear allowances SARS permits, fines, penalties and private expenses are added back, and an assessed loss from an earlier year can reduce the figure. Qualifying small business corporations also pay lower rates on the first part of their income.
Should interest be included before or after operating profit?
After. Interest depends on how the business is financed, not on how well it trades, so it is shown below operating profit. That keeps operating profit comparable between a business funded by a loan and one funded by the owner.