Tax Glossary
Key Tax TermEarned Income
Earned income is money you receive for working. It includes wages, salaries, tips, commissions, and self-employment income. It does NOT include investment income or passive income. Earned income is the foundation for many tax rules and credits.
💡Simple definition
Earned income is money you make by working—either for an employer or for yourself. If you actively do work to earn it, it's earned income.
✅What counts as earned income?
- ✓Wages from a job (Form W-2)
- ✓Salaries
- ✓Tips
- ✓Commissions
- ✓Bonuses
- ✓Self-employment or freelance income (reported on Schedule C)
- ✓Union strike benefits
- ✓Combat pay (elective for credit purposes)
❌What does NOT count as earned income?
These are not earned income because you didn't perform work to receive them:
- ✗Interest income
- ✗Dividends
- ✗Capital gains
- ✗Social Security benefits
- ✗Unemployment income
- ✗Pensions or retirement withdrawals
- ✗Rental income (unless you materially participate)
- ✗Child support or alimony (post-2018)
⭐Why earned income matters
Earned income is used to determine:
- ✓Your eligibility for the Earned Income Tax Credit (EITC)
- ✓Your eligibility for the Child Tax Credit
- ✓Whether you can contribute to an IRA
- ✓Your Social Security work credits
- ✓Your taxable income and tax bracket
🧮Quick examples
Example 1:You work at a restaurant and earn $28,000 in wages + $4,000 in tips. → All of this is earned income = $32,000
Example 2:You are a freelance designer who made $55,000 last year. → All of this is earned income = $55,000
Example 3:You earned $500 in dividends from stocks. → This is NOT earned income (it's investment income).
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