What is Earned Income?
Earned income is an IRS term for income that is obtained by participating in a business or trade. Earned income typically includes salaries and bonuses, wages, commissions and tips. Union strike benefits are also considered earned income, as are long-term disability benefits received prior to minimum retirement age.
How Does Earned Income Work?
Let's assume John Doe works in the marketing department for Company XYZ. His salary is $75,000 per year, and this year he also received a $5,000 bonus. His earned income is $75,000 + $5,000 = $80,000.
Let's assume John Doe quits that job and becomes a server at ABC Restaurant. He makes $9 an hour plus tips. Last year, he earned $30,000 in hourly wages and $11,000 in tips. John's earned income is $30,000 + $11,000 = $41,000.
Why Does Earned Income Matter?
Earned income is different from unearned income, which generally includes interest, dividends and similar proceeds. Pensions, social security, unemployment benefits, alimony and child support are also not considered earned income.
