Earned income is money you earn through an employer, self-employment, and in some cases, certain government benefits like unemployment benefits. Earned income is taxable, so if you are not paying taxes on all of your earned income throughout the year, you could end up with a tax bill.
According to the IRS, earned income is defined as all of the wages you earn from working an hourly or salaried job for a company or someone else, or employment you earn on your own, or through a business or farm you own and run.
Tax rates for earned income vary based on how much you earn and the type of income. Wages from an employer are taxed at set banded rates, while self-employment income is taxed at the same rate, with the individual also paying 15.3% of their earnings into Social Security and Medicare. So, you’ll pay more in income taxes when working for yourself. Rental income is also considered earned income if you’re the one collecting rent from the tenant.
Additionally, some government benefits are considered earned income for tax purposes. If you lose your job and apply for unemployment, this benefit is also subject to income tax. You can choose to have taxes taken out of your unemployment checks, or you can pay the tax in a lump sum when filing your tax return. Union strike benefits and certain long-term disability benefits may also be considered earned income.
Some types of income that are not considered earned income include Social Security benefits, investment income, capital gains, or dividends.