What Is Earned Income?
Earned income is any income that an employee gained or acquired having worked on a job for an employer or for oneself, in the case of being self-employed.
Earned income includes all the taxable income and wages you get from working for someone else, yourself, or a business you own. As long as it is registered, it is taxable. Any money a person receives for doing work is called an earned income.
Earned income must be agreed upon by both the employer and the employee; the duration of the work done or service rendered should equate to the reward at the end of the time agreed upon. Sometimes one earns more than the service rendered, and sometimes that is not the case.
Types of Earned Income
1. Passive Income: This is earned without a person taking an overly active role in the work done.
2. Active Income: Earned when a person takes an active role in the work done. It may be a deal with legal binding to receive the income whether the service is rendered or not. It can be salary or wages.
3. Capital Income: It is any form of income that is gained from owning an asset. The asset may increase in value, generating profit.
One can have different streams of income, which may include;
Salary or typical monthly income from your primary job, Business Income, Interest Income, Dividend Income, Rental Income, Capital Gains, Royalties, or Licensing Income.
Multiple streams of income reduce reliance on a single source.
Earned Income Example
Mark’s day job is as a coffee shop attendant. He combines this role with side gigs as a freelance video editor as well as shifts in a shelter as an instructor for the kids and a paid intern in a software startup in a remote role. His combined earnings from all his roles are termed as his ‘earned income’.« Back to Glossary Index