Earned Income
What Is Earned Income?
Earned income is money received from working or providing services. It includes wages, salaries, tips, commissions, and income from self-employment.
Earned income generally comes from active work rather than from investments or other passive sources.
Why It Matters
Earned income determines eligibility for several tax benefits and government programs.
Certain tax credits, including the Earned Income Tax Credit (EITC), are specifically designed to support taxpayers who earn income from work.
Earned income also plays a role in determining contribution limits for certain retirement accounts.
How Earned Income Works
Earned income typically includes compensation for labor or services performed.
Examples include:
- wages reported on a W-2 form
- income from freelance or contract work
- tips and commissions
- income from running a small business
Earned income is reported when filing a tax return and is generally subject to income tax and payroll taxes.
Example
If a person earns $40,000 from a full-time job and $5,000 from freelance work, both amounts are considered earned income.
Earned Income vs Unearned Income
- Earned income comes from working or providing services.
- Unearned income comes from investments or other non-work sources.
FAQs About Earned Income
Do tips count as earned income?
Yes. Tips received from work are considered earned income.
Is investment income considered earned income?
No. Investment income is typically classified as unearned income.
Why does earned income matter for tax credits?
Some credits require income earned from work to qualify.
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