what is earned income 
earned income is money received as pay for work performed such as wages salaries bonuses commissions tips and net earnings from self employment it can also include long term disability union strike benefits and in some cases payments from certain deferred retirement compensation arrangements earned income can be contrasted with unearned income also known as passive income which is money not acquired through working understanding earned incomefor tax purposes earned income is any income you receive for work you have done for an employer or a business of your own 1examples of income that isn t considered earned include government benefits such as payments from the temporary assistance for needy families program often referred to as welfare unemployment workers compensation and social security also excluded are disbursements from non deferred pensions and retirement plans alimony capital gains interest income from a bank account stock dividends bond interest passive income generated from rental property and salaries paid to inmates who work in a penal institution 2both earned and other types of income are generally taxable although sometimes at different percentage rates for example in the 2023 and 2024 tax years the federal government taxes earned income at seven separate rates or brackets ranging from 10 to 37 the thresholds tend to rise yearly to account for inflation and differ for single filers married couples filing jointly and heads of households 34long term capital gains on assets held for a year or more are taxed at 0 15 and 20 depending on the amount and your filing status short term capital gains which have been held for less than a year are taxed at the same rate as your earned income 5tax considerationsdetermining whether income is earned or unearned and reporting it on the appropriate lines of a form 1040 or other tax return is relatively straightforward for some taxpayers however other ramifications of earned income are worth considering if you are receiving social security benefits for example you may have to pay income tax on a portion of those benefits if you have earned income or other income over a certain threshold in that case up to either 50 or 85 of your benefits will be subject to tax depending on your income and filing status 6this can be an important consideration for people who plan to continue working after they are eligible for social security benefits or are deciding whether to delay filing for benefits if you are self employed you also need to consider how much earned and other income you expect to have for the year and pay estimated taxes each quarter based on that amount 7 if you fail to pay enough tax throughout the year you ll have to make it up when you file your tax return and you also may be subject to internal revenue service irs penalties 8if you receive social security benefits having earned income can affect whether those benefits are taxable 6types of earned incometaxpayers may collect an array of earned income and a single taxpayer may collect more than one type of earned income at any given time below are examples of types of earned income earned income tax credit eitc if you have a relatively low earned income and meet other qualifications you may be eligible for the federal earned income tax credit eic or eitc a refundable tax credit that can reduce your tax bill or result in a refund 9 to qualify for the credit you must file a tax return even if you don t owe any tax or otherwise wouldn t be required to file one 10the eitc was conceived as a type of work bonus plan to supplement the wages of low income workers help offset the effect of social security taxes and encourage work as a way to move people off welfare it continues to be viewed as an anti poverty tax benefit aimed to reward people for employment 11qualification for the earned income tax creditto qualify for the eitc you must have worked during the year and earned an income below a certain threshold depending on your marital status and number of children for example a single individual with one child would have a phaseout cap of 46 560 in 2023 and 56 004 in 2024 you may have investment income but it must be below 11 000 in 2023 and 11 600 in 2024 1213you must also the amount of eitc benefit you can receive depends on your income and the number of dependents you claim 1213if you are unsure whether you qualify or have questions about your specific situation seek advice from the irs or an independent tax expert most of this information will also be included in any tax filing software you use example of earned incomeimagine a taxpayer who earned a 50 000 salary from their day job a 10 000 bonus for their performance a 5 000 wage from their side gig and a 500 tip for that side gig in addition that taxpayer earned 1 000 in ordinary dividends and recognized 25 000 in capital gain distributions in this example the taxpayer must calculate their earned income to appropriately their tax liability based on the numbers above the only forms of earned income include therefore the taxpayer s earned income is 65 500 the remaining 26 000 1 000 of ordinary dividends and 25 000 of capital gain distributions are not considered earned income 