If you're sorting out your finances, planning for taxes, or just curious about what counts as earned income, you're not alone. The term “earned income” pops up on tax forms, loan applications, and government benefits—so knowing what it means matters. Let's break down what qualifies as earned income, cover key examples, and clear up what doesn't count.
What Is Earned Income?
Earned income is money you get from working. Think of it as the reward for your time, skill, or effort—whether you work for someone else, run a business, or take freelance gigs. If you’re paid because you did a job, that’s earned income.
You might earn cash, a check, direct deposit, or even tips, but the main thing is you worked for it. The IRS uses earned income to figure out things like the Earned Income Tax Credit (EITC) and also to set limits for certain benefits.
Common Sources of Earned Income
Photo by Andrea Piacquadio
Wages and Salaries
Wages and salaries are the bread and butter of earned income. If you work for an employer, your regular paycheck (before taxes) is earned income. This also includes overtime, hazard pay, and shift differentials.
Tips and Bonuses
If you work in a job where tips are the norm—like serving food or driving for a rideshare company—those tips count. The same goes for bonuses your employer pays you for great performance, hitting sales goals, or meeting project deadlines.
Commissions
Sales jobs often offer commissions. Whether it’s real estate, cars, or insurance, any cash you get for closing a deal qualifies as earned income.
Self-Employment and Freelance Income
Maybe you run your own shop, mow lawns on weekends, or build websites for clients. All your profits from self-employment are earned income. This includes gig work, side hustles, and online businesses.
Income from a Business or Farm
If you own a business or farm and you work in it, your share of those earnings is also considered earned income. You have to subtract your business expenses before you figure out your net income.
Certain Disability Benefits
If you receive disability benefits before reaching minimum retirement age because you can’t work, those can sometimes count as earned income—mainly for tax credits or benefit programs.
What’s Not Earned Income?
Not all money you receive is earned income. It’s important to know the difference, especially at tax time.
Common types of income that do NOT count as earned income:
- Interest and dividends from investments
- Pension or retirement income
- Social Security benefits
- Alimony or child support
- Unemployment benefits
- Income from rental properties (unless you provide substantial services)
- Gifts, inheritances, and lottery winnings
These sources are called "unearned income"—because you didn't directly work for them.
Earned Income: Employee vs. Self-Employed
It doesn’t matter if you’re an employee or self-employed—what matters is that you worked. Here’s how the two compare:
Employees
- Paid by an employer
- Regular paycheck with taxes withheld
- Usually receive a W-2 form for taxes
Self-Employed and Gig Workers
- Paid by a client or customer
- Responsible for your own taxes
- Report income on tax schedules (like Schedule C for the IRS)
Why Does Earned Income Matter?
It’s not just about filling out forms. Earned income affects:
- How much tax you pay
- Whether you qualify for credits like the EITC
- The amount you can save in retirement accounts like an IRA or 401(k)
- Eligibility for certain benefits
For example, in 2024, single filers with no children can claim the Earned Income Tax Credit if their earned income is under about $18,591. If you have kids, you can earn more and still qualify for the credit.
Earned Income and the IRS: Key Numbers for 2024
- EITC income cap (no kids): $18,591 (single filer)
- EITC income cap (with three+ kids): $56,004 (married filing jointly)
- Maximum EITC credit: ~$7,830 (three or more kids)
- Investment income limit: $11,600
All these numbers change each year, but the way earned income is defined stays consistent.
How to Report Earned Income
If you’re an employee, your employer reports your pay on a W-2 form—and so should you. If you’re self-employed, you track your own income and expenses and report them on tax forms like Schedule C.
The golden rule: if you worked for it, report it.
Examples: Which Is Earned Income?
Here’s a quick list—spot which ones are sources of earned income:
- Paycheck from your job (yes)
- Tips from waiting tables (yes)
- Profits from selling crafts online (yes)
- Monthly Social Security check (no)
- Dividends from stocks (no)
- Rental income from an apartment you own (no, unless you provide cleaning and similar services)
- Year-end bonus (yes)
- Child support (no)
- Consulting payment as a freelancer (yes)
When in doubt, ask: Did I work for this money? If yes, it’s probably earned income.
Conclusion
Understanding what counts as earned income helps you make better money decisions, qualify for tax breaks, and avoid mistakes. Earned income means money you work for—wages, salaries, tips, commissions, or self-employment. If you’re planning ahead or prepping taxes, make sure you can spot which dollars in your bank account are truly earned.
The line between earned and unearned income isn’t as confusing as it seems—just remember, earned income always has work behind it. If you’ve got more questions or need advice, chat with a tax pro to make smart choices for your future.