Difference Between Earned and Unearned Income (With Table)

There are lots of different sources available nowadays to earn money. And the money earned by them will fall under categories. And the two categories by which the money is divided are earned income and the other is unearned income. Both will help you in earning income, but the method and the ways will be different. 

Earned vs Unearned Income

The difference between Earned and Unearned Income is that in earned income, people will work to get the money, and they will pay the tax according to that. In unearned income, people will simply earn money without working, and the taxes will have differed for them since they are earning money by using some sources. 

Earned income is money earned by people working. This will include any kind of work by them, and the salary can be on a daily basis or on a monthly basis. But they should work and get the money; otherwise, it will not fall under the category of earned income. And for this kind of income, they should pay some tax to the government as well by depending on the amount earned by them. 

Unearned income is the amount earned by people by not working for that money. There are many ways to earn unearned income. And some of the commonly used methods by people are through passive income and getting interest rates from the money invested in their bank accounts. For this kind of income, you are required to pay a different kind of tax.

Comparison Table Between Earned and Unearned Income

Parameters of ComparisonEarned IncomeUnearned Income
DefinitionMoney earned by people by workingMoney earned by people without working
ExamplesJobs and daily wage workInterest amount from the bank, passive income
Types of taxesFederal income, payroll, and state incomeAdjusted gross income, and federal income tax
AdvantagesYour organization’s image will be improvedIRS penalties can be avoided
DisadvantagesYou have to do lots of work, and it will consume your timeYou have to pay different taxes, and the amount might be high sometimes

What is Earned Income?

Earned Income includes income that is earned by you from commissions, bonuses, tips, your salaries, self-employment, business, and daily wages. Any money that you earned from a job or self-employment is considered to be earned income. For this income, you will pay taxes as well. If you don’t work for any job and still getting money for that, then that is not considered to be earned income.

There are even 3 types of earned income available as well. This type of income will generally come under taxes. People who have very little earned income will be given federal income tax to be paid for by the government. Not everybody will earn a good income because there are daily wage workers who will earn on a daily basis. So, they are given some consideration by the government. No matter what kind of work you do, if you do it by yourself and earn money, then those will come under the category of earned income. 

There are even earned income credits that are available as well. But there are certain criteria to be met to get that earned income credit. Only then will you be eligible for that. Older people who are retired and getting pensions from the government will not fall under the category of earned income because they are getting money from the government without working. So, this kind of amount that is earned by them will often fall under the category of non-earned income. 

What is Unearned Income?

Unearned income is the amount that you earn without working. It is simply an amount that might be earned from your interest in the bank account or something of that sort. Even income that you earn passively will fall under the category of unearned income. This kind of income is not earned from any of your business sources or activities. It is simply the money without putting any amount of effort.

Here also taxed will be applied. But the taxes applied here will be very much different from what the taxes that are applied in earned income. Because those people are earning money by working and here in unearned income people are earning money by not working. Government officials show are retired from their jobs will get pension amount, and that will be calculated as an unearned income.

There are even types of unearned income available as well. With the help of unearned income, you can enjoy some benefits as well. If you want to earn some unearned income, the best way to do that is by depositing some amount in your bank account. So that you will get an interest rate for that amount, this amount will differ from bank to bank. Also, their interest policy will also differ. You have to check which one suits your requirement before you start to invest your money. 

Main Differences Between Earned and Unearned Income

  1. In earned income, people will work and then get money. On the other hand, in unearned income, people will simply earn money by not working.
  2. Some of the examples of earned income are doing 9-5 jobs, freelancing, and daily wage work. Examples of unearned income are alimony, passive income, and interest amount from banks.
  3. There are three different types of taxes available in earned income. On the other hand, there are two types of taxes available in unearned income.
  4. With earned income, you can easily improve your work and the organization that you are working for. In unearned income, you can easily avoid IRS penalties.
  5. The downside of an earned income is that you have to work hard to earn money. But in the unearned income, you can simply earn, but the tax will differ. 

Conclusion

Both these methods are available and are used by many people. Even people who earn on earned income basis also do this unearned income method so that it will help them to get some extra money on a side basis. People who earn an amount using these methods should keep in their mind that the taxes and the other process will be different, and they have to make sure they follow the rules.

There are some types available in this method as well. Also, there are lots of sources available, and in that, they can choose one method to earn their money. There are even some advantages and disadvantages available in these methods because of the difference in which the amount is made. 

References

  1. https://www.sciencedirect.com/science/article/pii/S0167268121001396
  2. https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/vrgtr18&section=14
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