Legal Definitions - earned income

Earned income refers to money you receive from working, either as an employee or through self-employment. It includes most forms of payment for services you provide, such as your regular salary, hourly wages, tips, bonuses, and commissions. For those who work for themselves, it includes the profits from their business after expenses.

This type of income is generally subject to income tax and is a key factor in determining eligibility for certain tax benefits, such as the Earned Income Tax Credit, which helps lower-income individuals and families reduce their tax burden.

• Example 1: Employee Wages and Overtime

  Maria works as a registered nurse at a local hospital, earning an hourly wage for her shifts and occasionally receiving overtime pay for extra hours worked. Both her regular wages and her overtime pay are reported on her W-2 form.

  Explanation: Both Maria's regular hourly wages and her overtime pay are considered earned income because they are direct monetary compensation for the medical services she provides as an employee.

• Example 2: Self-Employment Profit

  David operates a freelance graphic design business. He charges clients for logo designs, website layouts, and marketing materials. After deducting his business expenses, such as software subscriptions and office supplies, the remaining profit is his income from self-employment.

  Explanation: David's net profit from his graphic design business constitutes earned income because it is the monetary compensation he receives for the professional services he renders as a self-employed individual.

• Example 3: Salary, Commission, and Bonus

  Sarah works as a salesperson for a real estate agency. Her compensation includes a base salary, a commission for each property she sells, and an annual performance bonus based on her sales targets.

  Explanation: Sarah's base salary, the commissions she earns from property sales, and her annual performance bonus all qualify as earned income. They are all forms of direct payment for the sales services she provides to her employer.