Earned income refers to the total taxable wages and income you receive from actively working. This includes money earned through employment or self-employment. In some cases, it may also include certain disability payments and union strike benefits. Simply put, earned income is money you "work" for.
Understanding what qualifies as earned income is essential, especially when it comes to tax reporting and eligibility for certain tax credits, such as the Earned Income Credit.
What are examples of Earned Income?
The following are examples of earned income:
- Wages, salaries, tips, commissions, bonuses, and other taxable employee compensation
- Long-term disability benefits received before reaching the minimum retirement age
- Net earnings from self-employment, including:
- Operating a business
- Running a farm
- Working as a member of the clergy
- Working as a statutory employee
These types of income are considered earned because they result from active participation in a job or business.
What is not considered Earned Income?
The following types of income are not considered earned income:
- Rental income
- Interest and dividends
- Social Security benefits
- Alimony
- Child support
- Unemployment benefits
- Royalties
- Retirement income (e.g., pensions, IRAs)
These are typically classified as passive income or unearned income, which have different tax implications compared to earned income.
Why the distinction matters
The distinction between earned income and passive income is important because they are treated differently under tax law. For example, only earned income qualifies for the Earned Income Credit (EIC), a valuable tax benefit for low- to moderate-income workers.
Additional Information
For more information on the Earned Income Credit, click here.