What Is Earned Income?

By Indeed Editorial Team

Updated February 22, 2021 | Published January 5, 2021

Updated February 22, 2021

Published January 5, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

It's not unusual for people to work as independent contractors or have multiple jobs. Both of these scenarios can make filing taxes and determining types of income more complex than it is for those who work as an employee for a single company. Understanding what earned income is and how to appropriately identify it can make managing your taxes much simpler. In this article, we explain what earned income is, describe types of income that do not qualify as earned income, detail the earned income tax credit and provide the differences between earned income and gross income.

Related: Passive Income Opportunities to Earn Extra Money

What is earned income?

Earned income is an IRS designation for specific types of income. Generally, it is the wages and any other associated income resulting from self-employment. Common examples of earned income include:

  • Wages and salaries: The money you make from hourly or salaried work as a self-employed person counts as earned income.

  • Bonuses: Any bonuses you might receive from a client through your self-employment is also a type of earned income.

  • Commissions: You might earn a commission, or additional compensation based on performance, as part of your self-employment. This is a type of earned income.

  • Tips: Monetary tips you receive from clients through the course of your self-employment count as earned income.

  • Net earnings: As a self-employed individual, you'll need to calculate your net earnings, which is your total sales minus cost of goods sold and any other business expenses. Net earnings count as earned income.

There are a few other types of income that can count as earned income in some cases. It's best to consult a tax professional if you have any of these types of income to see if they're considered earned income or not in your specific situation:

  • Long-term disability: In some cases, long-term disability payments, which you receive for certain injuries or illnesses, count as earned income.

  • Union strike benefits: Some benefits you might receive from a union strike can also count as earned income.

  • Retirement compensation: The IRS also considers some deferred retirement compensation arrangements to be a type of earned income.

Related: Operating Income, Net Income and Net Operating Income: Definitions

What is not considered earned income?

Besides earned income, you may also receive unearned income from other business ventures or investment opportunities. Generally speaking, unearned income is money you receive from investing or earning money passively or other pre-established financial distributions. Common sources of unearned income include:

  • Annuity payments: An annuity is a type of insurance product that provides owners with a regular disbursement of income. Any disbursements you receive are likely considered unearned income.

  • Pension income: A pension is a type of retirement plan. Pension payouts are also probably unearned income.

  • Retirement account distributions: The IRS considers some distributions from retirement accounts as unearned income.

  • Capital gains: Capital gains are the profits you make from the sale of an asset, like a stock share, and often count as unearned income.

  • Interest income: Interest income is the money you make on an account like a savings account or CD, and it is usually categorized as unearned income.

  • Dividends: Some stocks provide dividends, which are regular payouts, usually quarterly, from company profits, categorized as unearned income.

  • Real estate income: Real estate income is a broad category that can refer to a few specific types of earnings, but generally, it refers to any income you make from a real estate venture. In most cases, the IRS considers any real estate income to be unearned income.

  • Alimony: Alimony is a court-ordered payment from a former spouse to maintain your lifestyle, and it's often thought of as unearned income.

  • Unemployment compensation: The state pays unemployment compensation to qualifying terminated or laid off job seekers and categorizes these payments as unearned income.

  • Some social security benefits: Some social security benefits, primarily those that are taxable, count as unearned income.

As with all things tax-related, it's advisable to consult a tax professional about your specific situation for advice and guidance.

Related: Earnings vs. Revenue: What Is the Difference?

What is the earned income tax credit?

The Earned Income Tax Credit, also called the EITC or EIC, is a tax refund for certain qualifying taxpayers. The qualifications change annually in conjunction with average wages and cost of living, but the EITC is designed for low- or moderate-income workers to ease their tax burden. The amount of money you can receive depends on a couple of factors like your total income and the number of children or dependents you support.

As noted, the qualifications change slightly each year. To qualify for the EITC in 2020, you should meet the following criteria:

  • Earned income: You must earn at least $1 in earned income.

  • Investment income: You can't earn more than $3,650 in investment income.

  • Filing status: You qualify as long as you're not married, filing your taxes separately.

  • Foreign earned income: You can't have any foreign earned income, as filed with IRS Form 2555 or IRS Form 2555-EZ.

Check with your accountant or another tax professional for additional questions or to assess your individual situation regarding the EITC.

Related: What Is Residual Income?

Differences between earned income and gross income

Earned income and gross income differ in ways that have important tax implications. Understanding what constitutes earned income and what constitutes gross income can help you confidently file your taxes:

Earned income

Generally speaking, earned income is any income you earn from your self-employed endeavors. Common sources of earned income include wages, salaries, tips, bonuses and commissions. Less common types of earned income include some long-term disability payments, some types of union strike benefits and some specific retirement compensation.

Gross income

Gross income includes all income a person earns generally. This includes types of income that fall into the earned income category like wages, salary and bonuses, but also includes investment income and other types of passive earnings. Essentially, any income you earn, whether it's from working or from passive sources like interest or investments, counts towards your gross income total.

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