Earned Income (Definition: What It Is And All You Must To Know)

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What Is Earned Income

Earned income is a phrase use to refer to income that you may earn from your employment or as a self-employed person.

You are essentially generating “earned income” when you work for yourself (self-employed) or for someone else (employee).

Commonly speaking, the following types of earnings are considered earned income:

• Wages
• Salaries 
• Tips
• Bonuses
• Commissions 
• Self-employment earnings 

It’s important to know what type of income you are generating as you have a good understanding of your sources of income, can make sound financial decisions, and also assess its tax consequences.

We can contrast “earned income” with “unearned income”.

Unearned income is a type of income that you generate through investments and sources other than employment or self-employment income.

Here are some examples of unearned income:

• Interest from savings accounts
• Bond interest 
• Capital gains 
• Dividend from stocks
• Rental income 
• Annuities 

You can also consider alimony, inheritances, gifts, lottery and gambling winnings as unearned income as well.

Earned Income Definition

According to Investopedia, earned income is defined as follows:

In other words, earned income is what you generally earn as an employee or your net earnings as a self-employed person.

Salaries, wages, commissions, tips, and net revenues from self-employment work are considered to be income earned.

Types of Earned Income

Let’s look at the different types of income by particularly looking at the IRS definition of earned income.

What Earned Income Includes

Here is a list of what the IRS considers as earned income:

• Wages
• Salaries
• Tips 
• Driving a car for booked rides or deliveries
• Running errands
• Doing tasks
• Selling goods online
• Providing creative services
• Providing professional services
• Providing other temporary, on-demand, or freelance work
• Self-employment work
• Benefits from a union strike
• Ceratin disability benefits
• Nontaxable Combat Pay

For tax purposes, the IRS considers that you have made “earned” income when you have worked for yourself or someone and made money.

What Earned Income Does Not Include

Here is a list of what the IRS does not consider as earned income:

• Inmate pay
• Interest payments (like bond interest or bank interest)
• Dividend payments (like stock dividends)
• Pensions
• Annuities 
• Social security payments (welfare)
• Unemployment benefits
• Alimony payments
• Child support payments 
• Workers’ compensation 
• Passive income from rental properties 

Earned Income Tax Credit

In the United States, some people may be eligible for the federal earned income tax credit (known as EIC or EITC).

If you qualify, then you can have a reduced tax bill or even be eligible to receive a tax refund.

You should consult the IRS website to see who qualifies for Earned Income Tax Credit (EITC).

Those with low to moderate levels of income may be eligible to receive EITC.

The IRS has an online tool that helps you assess whether or not you are eligible.

Earned Income vs Gross Income

What is the difference between earned income and gross income?

Earned income refers to the income that you can earn as an employee, such as wages, commissions, bonuses, and tips.

Earned income includes money you earn as a self-employed worker (business income less business expenses).

On the other hand, gross income is all types of income that you can generate in a year from all sources (active income, passive income, and portfolio income).

To get your gross income, you add up all your income as an individual and as an investor in a given year.

“Earned Income” Takeaways 

So, what is considered earned income?

What qualifies as earned income?

What are the different forms of earned income?

In this article, we tackled the question of what is earned income?

Earned income means all the income that you were able to make from your employment or your self-employed net income.

If you worked for a company and were paid a salary, your income qualifies as earned income.

Similarly, if you made commissions, received tips, got a nice bonus, or made any other types of income from your job, you received “earned income”.

Let’s look at a summary of our findings on the meaning of earned income.

Define Earned Income

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