Earned Income

What is Earned Income?

Earned income refers to the income by the person which can be the amount of salary; wages or employee compensation etc. received from the employer during the employment or can be income by an individual from their own business and such income is included while calculating the income of individual taxable under income tax.

In simple words, it refers to all the income which is earned either from being inactive employment (provided it is included in Gross Income) or by running a business. As per US Internal Revenue Services, it includes Wages or Salary, commission, bonus as well as Income from Business after adjusting for expenses incurred to earn the same in a gainful profession or business during the taxable year, which is usually the Calendar Year in the United States.

An important factor in understanding this concept is that it includes all income which one receives for the work done, which should involve personal efforts and doesn’t include incomes which are obtained without any effort such as DividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more, Gift, etc.

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For eg:
Source: Earned Income (wallstreetmojo.com)

What is all Income Included in the Calculation of Earned Income?

As per IRS guidelines, the following income forms its parts.

  • Long Term Disability benefits received to a person prior to the Minimum age of Retirement.
  • Benefits from Strike received on account of involvement in Union Activities collectively called Union Strike Benefits.
  • Earnings (net of expenses) received from rendering services as a Minister or member of the Religious Community.
  • Earnings (net of expenses) in the capacity of a Statutory Employee
  • Royalties, Commission, and Tips received.

Some of the Income received but not forming part of Earned Income are as follows

Examples

Let’s understand the concept with the help of an example:

Riya works as a Risk Manager with Union Global and has earned the following income during the year:

  • Salary: $20000
  • Bonus: $8000
  • Income from providing part-time consultancy: $4000
  • Dividends from Stocks: $1200

Further, Riya also received the following income:

In order to calculate this Income of Riya, the following Income will be added:

ParticularsAmount
Salary$20000
Bonus$8000
Income from providing part time consultancy$4000
Total Earned Income$32000

Other Incomes received by Riya are not included in the calculation.

Earned Income Tax Credit (EITC)

This Tax Credit (EITC) is a type of Tax rebate/credit made available to those whose income is below a certain threshold as decided by the IRS every year. Following points are worth noting in this regard:

  • Social Security Number (SSN) is a must for an individual to obtain EITC. It is also required for all including spouse and dependent qualifying children while obtaining EITC.
  • Deductions are provided based on the marital status of the person, number of qualifying children,
  • Whether Tax return is filed jointly with his/her spouse or not
  • Exemption relating to Dependent Care Expenses for qualifying children are adjusted from the Income.
  • The concerned taxpayer must have lived in the United States of America for not less than half a year for the year for which such credit is claimed.

Advantages

  • Increased Earning Income is a sign of economic strength and development of any nation. Higher the number of people having Earning Income more will be the tax collection for the Government, which will ultimately lead to expenditure on social welfare schemes and development of the nation.
  • It figures help in finding the number of people in gainful employment or business which are used by the government for determining various schemes and exemptions. 

Disadvantages

There are as such no disadvantages of having Earning Income. However, the government needs to ensure the following:

  • Exemptions should be structured in such a manner that people with a certain level of Earning Income are exempted from tax structure.
  • Calculation of Earning Income must be simplified so that more and more people having this income are able to compute their tax liability.

Important Points to Note

Earned Income Limits For Tax Year 2019

earned 1

The maximum amount of credit for Tax Year 2019 is:

  • $6,557 with three or more qualifying children
  • $5,828 with two qualifying children
  • $3,526 with one qualifying child
  • $529 with no qualifying children

Conclusion

It is the income received in the form of wages and salary and long-term benefits accruing out of disability. One can have this income in two ways, either by running a business or by working in gainful employment and receiving pay. There are certain types of Income which don’t form part of Earned Income and are not included for its calculation. Also, there are certain tax credits known as (EITC) which are available as exemptions, which further reduces the Taxable Earning Income and consequently, the Tax Liability of the Taxpayer.

This has been a guide to Earned Income and its definition. Here we look at what is Earned Income Tax Credit (EITC) along with the help practical example and applications. You may learn more about from the following articles –

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