Table of Contents
What Is Ordinary Income?
Let me explain ordinary income directly: it's the income you or an entity earn that's taxable at marginal tax rates. This includes things like wages, salaries, tips, bonuses, commissions, rents, and royalties.
You should also know that unearned income, such as short-term capital gains, unqualified dividends, and interest income, falls under ordinary income and gets taxed at those same marginal rates.
Key Takeaways
Ordinary income is straightforward—it's any income you have that's taxable at marginal tax rates. For example, it covers wages, salaries, tips, bonuses, commissions, rents, royalties, short-term capital gains, unqualified dividends, and interest income.
If you're an individual, your ordinary income usually means the pretax salaries and wages you've earned. It can also include unearned income like short-term capital gains, unqualified dividends, and interest.
In a corporate context, ordinary income comes from your regular day-to-day business operations, but it excludes income from selling capital assets.
Individual Income vs. Business Income
Ordinary income splits into two forms: personal income and business income. For personal ordinary income, think of it as cash inflow that's subject to the standard marginal income tax rates, as defined by the IRS.
For businesses, ordinary income is what you generate from your regular day-to-day operations, not including any income from selling long-term capital assets like land or equipment.
Remember, long-term capital gains and qualified dividends are taxed differently—they're not ordinary income.
How Ordinary Income Is Taxed: Marginal Tax Rates
You need to understand how ordinary income gets taxed through marginal rates. Here are the rates for tax years 2024 and 2025 for individuals and married couples filing jointly.
2024 Tax Year
For single taxpayers, the brackets are: 37% over $609,350, 35% over $243,725, 32% over $191,950, 24% over $100,525, 22% over $47,150, 12% over $11,600, and 10% under $11,600. For married couples filing jointly: 37% over $731,200, 35% over $487,450, 32% over $383,900, 24% over $201,050, 22% over $94,300, 12% over $23,200, and 10% under $23,200.
2025 Tax Year
For single taxpayers: 37% over $626,350, 35% over $250,525, 32% over $197,300, 24% over $103,350, 22% over $48,475, 12% over $11,925, and 10% under $11,925. For married couples: 37% over $751,600, 35% over $501,050, 32% over $394,600, 24% over $206,700, 22% over $96,950, 12% over $23,850, and 10% under $23,850.
Examples
Let's look at individuals first. Your ordinary income typically includes salaries and wages from employers before taxes. If you have a customer service job at Target earning $3,000 per month, that's $36,000 annually, taxed as gross income on your return. Add $1,000 monthly rent from a property, and it becomes $48,000 per year. Deductions can reduce what's taxable.
For businesses, ordinary income is pretax profit from selling products or services. Take Target: they had $107.4 billion in revenue for the fiscal year ending Feb. 3, 2024, but after $77.7 billion in cost of sales, $21.5 billion in SG&A, and depreciation, ordinary income was $5.7 billion, subject to taxation.
Dividends and Taxes
Most stock dividends on long-term investments are taxed at a lower rate than ordinary income. The 2003 JGTRRA reduced taxes on most dividend income and some capital gains to 15%, encouraging companies to pay dividends.
In 2017, the TCJA set qualified dividend rates at 0%, 15%, or 20% based on your income and filing status. Unqualified dividends come from REITs, ESOs, tax-exempt companies, savings, or money markets.
Regular dividends from for-profit companies usually qualify for reduced rates, but you must meet holding periods: over 60 days in a 121-day period starting 60 days before ex-dividend for common stock, or 90 days before for preferred stock.
What Is Taxed As Ordinary Income?
Most of your income is taxed at regular marginal rates, but exceptions like long-term capital gains and qualified dividends get better rates.
Is Rent Ordinary Income?
Yes, rental income is payments for property use or occupation, taxed as ordinary income per IRS. You can deduct costs like mortgage interest, property tax, repairs, advertising, maintenance, condo fees, and insurance to reduce the taxable amount.
Do Individuals Have to Report Interest Income?
Yes, most interest is taxed as ordinary income at regular rates. Exceptions include interest from post-1989 Series EE or I bonds for education, VA insurance dividends, and some government bonds. Report it even if not taxable.
The Bottom Line
Ordinary income is taxed at marginal rates. As an individual, you pay on salaries, tips, rent, and interest. Businesses earn it from operations supplying goods and services.
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