Earned Income

Earned income is the amount of money a person earned for a particular work he or she did or completed. It comprises salaries, wages, bonuses. Moreover, tips, commissions and earnings received via the internet (usually this is a way of earning for self-employed people) are considered an earned income as well. Also, special payment, which a person gets from union strike as a benefit, for disability or retirement arrangements.

There is a different type of income, which is unearned income. Also, it’s called passive income, which refers to the money that wasn't acquired through working.

Difference between Earned Income and unearned income

Most commonly payments for work a person has done is considered as earned income. However, not all money that a person receives may be regarded as earned income, in some countries there is an extremely wide range of different payments. For example, in the U.S. people can receive money under the special program called Temporary Assistance for Needy Families (also, may be considered as welfare), also, there are unemployment payments, workers’ compensation. All kinds of passive income, such as stock dividends, bond interests, income received from rental property, alimony, interests from bank account and also inmates’ salaries aren’t regarded as earned income as well.

Normally, all kinds of income are subjected to tax, but the percentage rates depend on the situation. For instance, in the U.S. in both in the 2021 and in the 2022 the government subjected to a tax in seven rates, which are between 10 percent and 37 percent.

Special conditions

It’s quite easy to distinguish where your income is earned or unearned and then report it. However, there are some particular things that certain taxpayers need to know.

For example, in some countries, in case you’re entitled to some Social Securities benefits, you may be asked to pay taxes, if your income is higher than a determined threshold. If this happens a half or even more of your income may be subjected to tax (more precise percentage will be calculated according to your total income).

In case you’re self-employed, it doesn’t mean that you aren’t subjected to taxes. On the contrary, it’s more difficult for the self-employed since they have to report their earned income and estimate their future income, then pay estimated taxes every four months according to the predicted amount. If a self-employed person estimates wrong, he or she has to make it up when you file your tax return, otherwise authorized organs may subject him or her to penalties.

Tax Credit

Governments in some countries may provide workers tax credit in case their income isn’t high enough. In general, these credits reduce the amount of taxes people should pay.

In the U.S. there are also extra payments for the workers, which is called earned income tax credit (EITC). It’s regarded as a bonus and is paid to people with not so high income, it encourages people to withdraw themselves from welfare and helps to reduce tax impact. In some ways this credit is considered as a measure aimed to reduce poverty and reward working people.