Earned Income

Published Apr 8, 2023

Definition of Earned Income

Earned income is income that is generated by an individual’s own effort, skills, and knowledge, typically through employment or by owning or operating a small business. That means it includes wages, salaries, bonuses, tips, and commissions derived from the work an individual undertakes. Earned income is generally subject to income tax, social security contributions, and Medicare expenses.

Example

To illustrate earned income, consider the example of Maria, a marketing professional who works for a large multinational corporation. She earns a salary of USD 80,000 per year plus a bonus of USD 10,000 if the company meets its annual sales targets. This is an example of earned income, as it is derived from the work that Maria performs for her employer.

Another example could be a self-employed plumber who earns income by offering plumbing services to clients.

Why Earned Income Matters

Earned income is crucial for most people as it enables them to meet their basic needs, such as food, housing, and healthcare. Earned income also provides a sense of financial security and can help individuals build wealth over time.

However, it is subject to income tax and other deductions, which can reduce the amount individuals take home. Hence, it is critical to be aware of these deductions to plan one’s finances properly.