Definition: Earned income represents the taxable income earned from paid employment, business ownership, or from disability payments. In essence, this is payment for labor or services rendered.
What Does Earned Income Mean?
What is the definition of earned income? In general, earned income includes wages, salaries, and/or tips, union strike benefits, long-term disability benefits received prior to retirement age, and net earnings from employment as a business owner or a statutory employee.
On the contrary, earned income does not include dividends from investment, interest earned on a bank account, social security, retirement income, unemployment benefits and child support/alimony. Eligible beneficiaries can choose if they want their nontaxable earned income to appear on their Wage and Tax Statement W-2 Form, depending on whether including the earned income increases or decreases their Earned Income Tax Credit (EITC).
Let’s look at an example.
Example
Alex works in the sales department of a leading technology company, and he earns $80,000 annually. Every three months, depending on the sales he achieves, he earns a bonus of $4,000. In 2016, his performance earned him all bonuses, so he received a total bonus of $12,000. At the end of 2016, Alex had an earned income of $80,000 + $12,000 = $92,000.
Alex’s sister, Janette, works as a server at a local pizzeria. She earns $10 per hour plus tips. At the end of 2016, Janette had an earned income of $28,000 in hourly wages and $8,000 in tips. So, her total earned income was $28,000 + $8,000 = $36,000.
Janette’ brother, George, is married with two children, and work as a tax accountant at a local tax office. He earns $85,000 annually with no bonuses. However, he has a second source of income as a tax preparer for individual accounts. George charges $15 per hour. At the end of 2016, George’s earned income is $85,000 + $27,000 = $112,000.
Each one of the above individuals has a different earned income, depending on the job they do, if they earn bonuses, if they earn hourly wages, and so on. In order to know whether they qualify for an Earned Income Tax Credit, they should consult their accountant or the IRS.
Summary Definition
Define Earned Income: EI means revenues that required work to receive.
