Understanding Earned Income: Definition and Examples

by Knowledge Resources |

Earned income is income that is earned through work or employment. This can include wages, salaries, tips, commissions, and other forms of compensation for work. Earned income is different from unearned income, which includes things like interest, dividends, and capital gains.

Examples of Earned Income

There are many examples of earned income in various contexts:

  1. Wages and Salaries. The most common form of earned income is wages and salaries earned through employment. This can include hourly pay or an annual salary.
  2. Tips and Gratuities. Tips and gratuities earned by service workers, such as waiters and bartenders, are also considered earned income.
  3. Commissions. Salespeople who earn commissions on their sales are also earning earned income.
  4. Bonuses. Bonuses earned by employees, such as end-of-year bonuses, are also considered earned income.
  5. Self-Employment Income. Self-employed individuals who earn income through their own business or trade are also considered to be earning earned income.

Impact of Earned Income on Taxes and Social Security

Earned income can have an impact on taxation and social security. For example, earned income is subject to payroll taxes, which includes Social Security and Medicare taxes. This means that a portion of an employee’s earnings will be withheld to pay for these taxes.

Additionally, earned income can impact tax liability. The amount of earned income earned can determine an individual’s tax bracket and tax rate. Those who earn more will typically pay a higher tax rate.

Earned income can also impact social security benefits. Social Security benefits are based on an individual’s earnings history. The more an individual earns over their lifetime, the higher their social security benefits will be. This is why it is important to accurately report earned income to the Social Security Administration.

Conclusion

Earned income is a type of income that is earned through work or employment. It includes wages, salaries, tips, and other forms of compensation for work. Understanding earned income is important for individuals, businesses, and policymakers, as it can impact taxation, social security, and other financial considerations. When earning earned income, it is important to accurately report it to ensure that taxes and social security benefits are properly calculated.

 

 

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