Tax Filing Help

What is Earned Income?

Earned income often comes up when preparing tax returns. Earned income is used in calculating many tax credits, tax deductions and exemptions. Below is the definition of earned income as well as examples of what income sources are considered earned income and what income sources should be excluded when calculating earned income. One of the most common use of earned income is to calculate earned income tax credit or EIC.

Definition of earned income

Earned income is income received for services performed as an employee (W-2) or as a result of self-employment.

Examples of earned income
  • Employees' earnings: Wages, salaries, tips, bonuses, commissions, other taxable employee pay (reported on W-2 and transferred to the tax form 1040)

  • Self Employment earnings: Earnings from self employment (reported on 1099-MISC and transferred to Schedule C)

  • Taxable scholarships and fellowship grants

Examples of the type of income not considered earned income

One of the hardest part about calculating earned income credit is calculating earned income. Most taxpayers have income from various sources and not all of them should be included as earned income. Below are sources of income that should not be included when computing earned income for earned income tax credit purposes or others.

Examples of Unearned income
  • Unemployment compensation
  • Social Security benefits and Railroad retirement benefits
  • Interest income
  • Dividend income
  • Capital gain distributions
  • Child support
  • Alimony
  • Pension income (not certain disability pensions)
  • Worker's Compensation
  • Veteran's benefits
  • Welfare benefits