Legal Definitions - unearned income

Unearned income refers to money received from sources other than direct employment or active labor.

Unlike a salary or wages, which are paid in exchange for services performed, unearned income typically comes from investments, benefits, or assets that generate revenue passively.

• Example 1: Rental Property Income

  Imagine Sarah owns a small apartment building. Each month, she collects rent payments from her tenants. While she might spend some time managing the property, the rental income itself is considered unearned because it is generated by her asset (the building) rather than her direct, ongoing labor or services provided to the tenants in exchange for that specific payment.

• Example 2: Book Royalties

  Consider David, a retired author who wrote a popular novel many years ago. He continues to receive royalty checks whenever copies of his book are sold. These royalty payments are unearned income because they are a result of his past creative work, not compensation for current services he is actively performing. The income flows from the intellectual property he created.

• Example 3: Pension Payments

  Maria retired from her job last year and now receives a monthly pension from her former employer. This pension is a form of unearned income. Although it was earned through her years of service, the payments she receives now are not in exchange for current work. Instead, they are a benefit paid out based on her past contributions and employment history.