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

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What is earned income?

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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:

Earned income includes money made from employment including wages, salaries, bonuses, commissions, tips, and net earnings from self-employment, according to the Internal Revenue Service (IRS) definition. 
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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

  • Earned income is a type of income that an individual receives as a self-employed person (net business income) or as an employee (labor income)
  • According to the IRS, earned income includes wages, salaries, tips, benefits from a union strike, certain disability benefits, and money from a job where your employer may not have withheld any taxes such as driving a car for booked rides or running errands
  • Some types of income are excluded from earned income such as interest income, dividend income, pension income, annuity income, alimony, child support, welfare, and unemployment benefits
  • Depending on how much you’ve earned, you may qualify for a credit called “earned income tax credit” or “EITC” giving individuals a tax break or even a tax refund 
Active income 
Business income 
Capital gain income 
Deferred income
Disqualifying income
Dividend income 
EITC Tables
Employment income 
Investment income 
Ordinary income
Personal income
Portfolio income 
Profit income 
Residual income
Roth IRA income
Royalty income 
Self-employed income
Taxable income
Unearned income
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Adjusted Gross Income (AGI)
Diversify income
Examples of Passive Income
Gross income
How to make passive income 
Income statement 
Income streams
Net income 
Net income vs adjusted gross income 
Passive Income Apps
Passive Income Books
Passive income generator 
Passive income ideas 
Passive Income Meaning
Passive Income Strategies
Passive income types 
Unearned income
What is passive income
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