5 Common Examples of Taxable Earned Income

The credit amount depends on your income, marital status, and family size. In 2021, the credit is worth up to $6,728. The credit amount rises with earned income until it reaches a maximum amount, then gradually phases out. Families with more children are eligible for higher credit amounts.

You cannot get the EITC if you have investment income of more than $10,000 in 2021. Investment income includes taxable interest, tax-exempt interest, and capital gain distributions.

If you claim children as part of your EITC, they must pass three tests to be a “qualifying child”:

To claim the EITC, you must file a tax return. If you are claiming a child for the EITC, you also need to submit “Schedule EIC”.

Going to a paid tax preparer is expensive and reduces the amount of your tax refund. Luckily, there are free options available. You can visit a Volunteer Income Tax Assistance (VITA) site or GetYourRefund.org to have IRS-certified volunteers accurately file your taxes for free. You can also visit MyFreeTaxes.com to file your own taxes for free online if you do not have self-employment income.

Many states have their own version of the federal EITC that can add more money to your tax refund. Most states match a percentage of your federal credit amount. Find out if your state has a state-level tax credit.

What is Earned Income (and why it’s important)

5 examples of taxable earned income

Here are some of the more common examples of taxable earned income:

Wages

Wages are the amount of money you earn for the total number of hours you work within a given year. An employee and their employer typically agree on the wages earned per hour before the employees start date. When you file your taxes, youll enter the wages you earned throughout the year.

A company will usually withhold federal, state, Social Security and Medicare taxes. Once tax season begins, your company will issue you with a W-2 form that states your earned income and the total amount of taxes withheld.

Salary

Similar to hourly wages, a salary is also the amount of money that an employee earns while working for a company. However, a salary isnt based on the total number of hours you work within the year. Instead, you and your employer agree on the total amount that they pay you for the year regardless of how many hours you work.

A salary usually comes with additional benefits that can include healthcare or life insurance. Salaried employees also receive a W-2 tax form that shows the amount of money they earned during the year and any portions of it that are withheld.

Tips, bonuses and commission

Tips, bonuses and commission are any additional payments that you receive in addition to your wages or salary. Since youre still receiving compensation for your work, these are also considered taxable earned income, and you need to report them when you are filing your taxes.

Employers have to report some earned tips, which are usually included on your W-2 tax form. For those earned tips, bonuses or commission payments that are not reported by an employer, an employee will have to record, track and report them once they file their taxes.

Net self-employment income

The net income you earn from being self-employed is also taxable earned income. Unlike a salary or hourly wages, self-employed income gets reported using either a 1099 tax form or a 1040-ES tax form. The 1099 tax form is prepared by employers who hire you as an independent contractor, whereas the 1040-ES form is used to report your estimated taxes for the year if you run your own business.

Alimony payments

Alimony payments are usually monthly payments made to a former spouse. The court decides the amount of this payment after a couple goes through their divorce proceedings. It is also often referred to as spousal maintenance payments. Alimony payments must also be reported and taxed as earned income. However, new alimony settlements are no longer considered taxable earned income. If your alimony payment agreement predates December 31, 2019, then youll still need to report it as taxable income.

What is earned income?

Earned income is any money that you earn for work done throughout a fiscal year. This income can come from your employer or self-employment, and it also includes benefits, pensions and tips. Its essentially any taxable income that you receive specifically for your work. A basic understanding of earned income helps you understand your finances better, and it helps you accurately file your taxes.

What is the difference between earned income and gross income?

Gross income is all the money that you make within the year. Your gross income includes everything you receive under earned income and also other forms of income, such as assets, retirement payments and taxable payments for services rendered. The main difference between your gross income and your earned income is that earned income is specifically earned by working for an employer or from being self-employed.

What is the earned income tax credit?

The earned income tax credit is a credit that anyone who has earned income can receive, so long as they meet certain eligibility requirements. You can use this credit when you file your taxes, which should reduce the amount of taxes you owe or increase your refund.

This tax credit is generally meant to benefit employees and individuals who are in lower tax brackets. You can only use this credit if you have earned income, so gross income doesnt apply. That means that wages, salary, tips and self-employed income are eligible.

Examples of taxable income that are not earned income

Earned income is not the only form of taxable income, and this is an important distinction to make. Your gross income is also taxable, even though some portions of it may not necessarily be classified as earned income. Here are some other examples of taxable income that are not considered earned income:

Federal and state benefits

Most forms of benefits count toward your gross income, and as such, they are also taxable. Examples of more common benefits include unemployment benefits and disability retirement benefits. In rare cases, disaster relief benefits can be considered a taxable income if they are used for anything other than necessary expenses.

Pension plan payments

A pension plan lets you save money while employed, and in most cases, your employer also contributes to your pension plan. The income that you are given from your pension plan is considered taxable income since it is part of your gross income.

When money is taken out of your paycheck and put into your pension plan, it is usually deducted pre-tax. This means that the money going into your pension account is not taxed, which is why it is taxed as earned income once you start to spend it.

FAQ

What is considered an earned income?

To qualify for the EITC, you must:
  • Have worked and earned income under $57,414.
  • Have investment income below $10,000 in the tax year 2021.
  • Have a valid Social Security number by the due date of your 2021 return (including extensions)
  • Be a U.S. citizen or a resident alien all year.

What is earned income vs gross income?

To be a qualifying child for the EITC, your child must be your: Son, daughter, stepchild, adopted child or foster child. Brother, sister, half-brother, half-sister, stepsister or stepbrother. Grandchild, niece or nephew.

What is earned income vs ordinary income?

Earned income tax credit (EITC) is a benefit for working people with low to moderate income that the federal government, many states and some local communities offer. It is designed to incentivize work and help reduce poverty, particularly for families with children.

What is earned income versus unearned income?

For the year you are filing, earned income includes all income from employment, but only if it is includable in gross income. Examples of earned income are: wages; salaries; tips; and other taxable employee compensation. Earned income also includes net earnings from self-employment.

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