Earned income is the total taxable compensation you earn through work. Income can be earned through traditional employment or self-employment. According to this earned income definition, net wages from self-employment also count.
Generally speaking, earned income is taxable, although at different rates, sometimes. Thus, it is important to learn about earned income, as it determines what income rate you are taxed at. For example, if you have self-employment income, you’ll pay all of your Social Security tax, instead of an employer paying half of it. Your earned income can also help determine whether you are eligible for tax credits.
Earned Income vs. Unearned Income
When comparing earned vs. unearned income, there is a distinct difference: earned income deals primarily with compensation from employment, while unearned income comes from sources unrelated to employment, such as through inheritance, or passive sources of income like rent.
The following are examples of IRS earned income:
- Wages, salaries, bonuses, and tips
- Net earnings after business expenses (self-employment)
- Long-term disability
- Union strike benefits
In contrast, here are some examples of what the IRS deems as unearned income:
- Interest on savings accounts
- Bond interest
- Child support
- Stock dividends
- Worker’s compensation
- Retirement accounts such as a 401k
A major difference between unearned income and earned income is that taxes are often deferred on the former sources of income. As a result, this allows one to avoid IRS tax penalties or paying higher rates of taxes.
Call ATM Tax Pro Today with Your Earned Income Tax Questions
It is absolutely vital that you be able to fill your taxes correctly, especially when it comes to earned and unearned income. If you don’t, it could cost you dearly. The best way to ensure you fill out your taxes correctly is to have a professional in your corner that knows the tax law inside and out, like those at ATM Tax Pro.
Our tax services are specifically designed to help lift the burden of taxes off of your shoulders. We can tailor a plan to your financial situation. Contact us today to schedule an appointment with one of our professionals.