What Is Earned Income?

What Is Earned Income?

Let me explain earned income directly: it's the money you get paid for the work you do, covering things like wages, salaries, bonuses, commissions, tips, and your net earnings if you're self-employed. For taxes, it can also include long-term disability payments, union strike benefits, and sometimes payments from certain deferred retirement plans.

You should know that income from investments or government benefits doesn't count as earned— that's unearned or passive income.

If you're a low- or moderate-income earner, you might qualify for the earned income tax credit (EIC or EITC), which cuts your tax bill and could even give you a refund based on your income and how many dependent children you have.

Key Takeaways

Earned income comes from your job or self-employment. Investments and government programs provide unearned income instead. Taxes on earned income differ from those on unearned. If you're employed with low income, check for EITC eligibility.

Understanding Earned Income

For tax purposes, earned income is straightforward—it's what you receive for work done for an employer or as your own boss.

Examples of what's not earned include government benefits like Temporary Assistance for Needy Families, unemployment, workers’ compensation, and Social Security. Other unearned types are pensions, alimony, capital gains, interest, dividends, bond interest, rental property income, and even salaries for inmates working in prison.

Both types are taxable, but at different rates. The federal government hits earned income with seven brackets from 0% to 37%, adjusted yearly for inflation, and varying by filing status like single, married joint, or head of household.

Fast Fact

Long-term capital gains on assets held over a year get taxed at 0%, 15%, or 20% based on amount and filing status, while short-term gains match earned income rates.

Tax Considerations

Figuring out if your income is earned or unearned and reporting it on Form 1040 or 1040-SR is usually simple. But consider other factors: if you get Social Security, you might owe tax on part of it if your total income exceeds thresholds—up to 50% or 85% taxable, depending on your situation.

This matters if you keep working after Social Security age. If self-employed, estimate your earned and unearned income yearly and pay quarterly taxes; otherwise, you'll owe when filing and might face penalties.

Important

Your earned income decides if Social Security benefits are taxable.

Types of Earned Income

You might have multiple sources of earned income. Salaries or wages are the basics—payment for your labor, hourly or fixed. Self-employment counts too, for freelancers, consultants, or business owners. Tips and commissions add to regular pay, common in service or sales. Bonuses come for hitting goals. Honorariums are for things like speaking gigs. Long-term disability benefits before retirement age can qualify.

Earned Income Tax Credit (EITC)

If your income is under certain limits, you qualify for the EITC, a refundable credit that lowers taxes or refunds what you paid, varying by family size and filing status. File a return even if you don't owe taxes to claim it. It's designed to boost low-income workers, offset Social Security taxes, and fight poverty.

Qualifications for the EITC

To qualify, work during the year with income below thresholds, adjusted for inflation. Credit amount depends on marital status and dependents. You need a valid Social Security number by return due date, be a U.S. citizen or resident alien all year, not file for foreign earned income, and meet rules if separated and not filing jointly. Benefit size ties to income and dependents. If unsure, consult IRS or a tax expert—most software covers this.

Example of Earned Income

Picture this: you earn $50,000 salary, $10,000 bonus, $5,000 from a side gig, $500 tips, plus $1,000 dividends and $25,000 capital gains. Your earned income is just the salary, bonus, wages, and tips—totaling $65,500. The rest is unearned, reported separately on Form 1040.

What Are Some Examples of Unearned Income?

Unearned includes interest from savings or CDs, bond interest, alimony, capital gains, dividends, retirement accounts, Social Security, inheritances, gifts, welfare, rental income, and annuities.

How Do I Know If I Have Earned Income?

If you got paid for working, that's earned— from a job or selling something profitably. Check IRS guidance if in doubt.

What Is the Difference Between Earned and Unearned Income?

Earned is from work; unearned from investments or benefits. IRS taxes them differently—unearned skips payroll taxes, isn't subject to Social Security/Medicare, and can't fund IRAs.

The Bottom Line

Earned income is your pay from jobs or self-employment, like wages or bonuses, unlike unearned from investments or benefits. They're taxed differently, and low earned income might get you the EITC for tax relief or refunds.