Gross Income vs. Earned Income:An Overview
The distinctions between gross income and earned income are especially important to understand in relation to tax accounting. Report either one incorrectly and you could end up paying more in taxes than you really need to.
Gross income is everything that an individual earns during one year, both as a worker and as an investor. Earned income includes only wages, commissions, bonuses, and business income minus expenses, if the person is self-employed.
Key Takeaways
- Gross income is all income an individual earns during the year both as a worker and as an investor.
- Gross income is derived from income sources beyond those related to employment.
- Earned income only includes wages, commissions, bonuses, and business income minus expenses, if the person is self-employed.
- Gross income and earned income, along with adjusted gross income and modified adjusted gross income, are crucial for tax preparation and filing.
Gross Income
According to the Internal Revenue Service (IRS), gross income is defined as all income an individual receives in the form of money, goods, property, and services that isn't tax exempt.
Gross income includes all the income that constitutes earned income—namely, wages or salary, commissions, and bonuses, as well as business income net of expenses if the person is self-employed.
It also includes income that doesn't come from employment. For instance, it includes income from investments, such as interest and dividends, as well as retirement income represented by retirement account withdrawals.
Additionally, gross income includes Social Security benefits, as well as Social Security disability benefits, unemployment payments, alimony, and child support.
Earned Income
Earned income does not include the same range of income that is accounted for by gross income.
According to the IRS, earned income includes salaries, wages, professional fees, tips, and other amounts received as pay for work performed.
Earned income may also include the fair market value of certain fringe benefits that are deemed taxable through an employer under the direction of the IRS guidelines, long-term disability benefits received prior to minimum retirement age, and strike benefits from involvement in union activities.
Your gross annual income is used to determine what deductions, exemptions, and credits are available to you to determine your total taxable income and then your total tax obligations for the year.
Key Differences
Make sure that you understand the aforementioned differences between gross income and earned income before you prepare and file a tax return.
Gross income is considered total income for the purpose of tax preparation and filing. It is used to further determine your total tax liability.
Gross income is the starting point for calculating your adjusted gross income (AGI), which is your income after deductions. Your modified adjusted gross income (MAGI) is similar to your AGI but with certain deductions added back to the total.
Each of these figures is used in a different way to determine total taxable income and, ultimately, your total tax obligation based on your net income for the year.
Special Considerations
Per IRS regulations, your total earned income determines whether or not you can take certain financial actions throughout the year.
For instance, you can contribute to an individual retirement account only if you have earned income for the year. Moreover, that contribution may not exceed your total earned income for that year.
Where Is Gross Income Listed?
Generally speaking, nowhere until you calculate it by totaling all revenue that you receive during the tax year from all income sources.
When Is Income Not Earned Income?
When it isn't derived from your employment. So, for example, pension benefits, welfare benefits, annuity income, and Social Security benefits are income, but not earned income.
Where Do I Find Adjusted Gross Income on My Tax Return?
For tax year 2023, the place where your AGI should be inserted on your tax return is line 11 of Form 1040.
The Bottom Line
Gross income, earned income, adjusted gross income, and modified adjusted gross income provide the foundation for tax preparation and filing.
The difference between gross income and earned income is an important distinction for your tax accounting. So be sure you understand it when working on your return.
FAQs
For the year you are filing, earned income includes all income from employment, but only if it is includable in gross income. Examples of earned income are: wages; salaries; tips; and other taxable employee compensation. Earned income also includes net earnings from self-employment.
What are examples of earned income? ›
For the year you are filing, earned income includes all income from employment, but only if it is includable in gross income. Examples of earned income are: wages; salaries; tips; and other taxable employee compensation. Earned income also includes net earnings from self-employment.
What is the definition of earned income? ›
Earned Income. Earned income includes all of the following types of income: Wages, salaries, tips, and other taxable employee pay. Employee pay is earned income only if it is taxable. Nontaxable employee pay, such as certain dependent care benefits and adoption benefits, is not earned income.
Is adjusted gross income the same as income earned from work? ›
Adjusted gross income, also known as (AGI), is defined as total income minus deductions, or "adjustments" to income that you are eligible to take. Gross income includes wages, dividends, capital gains, business and retirement income as well as all other forms income.
What qualifies as unearned income? ›
Unearned Income. Unearned income includes investment-type income such as taxable interest, ordinary dividends, and capital gain distributions. It also includes unemployment compensation, taxable social security benefits, pensions, annuities, cancellation of debt, and distributions of unearned income from a trust.
What is considered gross income? ›
For individuals, gross income is all the money you earn before taxes and other deductions are subtracted. Your earned income can come in many forms: salary, bonuses, tips, hourly wages, rental income, dividends from stocks and bonds, and savings account interest.
Is earned income the same as gross income? ›
Gross income is all income an individual earns during the year both as a worker and as an investor. Gross income is derived from income sources beyond those related to employment. Earned income only includes wages, commissions, bonuses, and business income minus expenses, if the person is self-employed.
What qualifies you for earned income? ›
Earned income is wages, salaries, tips, and other employee compensation that is subject to California withholding, or net income from self-employment.
How to calculate earned income? ›
This is any income from wages, salaries, tips or any other earned income that is taxable. Do not include any non-taxable benefits in this total. Also include any earnings from farms, farm partnerships or businesses that did not require payment of self-employment taxes.
Is Social Security considered earned income? ›
Unearned Income is all income that is not earned such as Social Security benefits, pensions, State disability payments, unemployment benefits, interest income, dividends, and cash from friends and relatives.
In short, gross income is a person's total earnings prior to taxes or other deductions. It includes all income received from all sources: including money, property, and the value of services received.
At what age do you no longer have to file taxes? ›
At What Age Can You Stop Filing Taxes? Taxes aren't determined by age, so you will never age out of paying taxes.
How much can you make without filing taxes? ›
Tax Year 2022 Filing Thresholds by Filing Status
| Filing Status | Taxpayer age at the end of 2022 | A taxpayer must file a return if their gross income was at least: |
|---|
| single | under 65 | $12,950 |
| single | 65 or older | $14,700 |
| head of household | under 65 | $19,400 |
| head of household | 65 or older | $21,150 |
6 more rowsIf you're under the age of 65, you should file taxes if you made $12,950 or more in 2023. Filers who are 65 or older should file taxes if they made $14,700 or more.
What is not included in gross income? ›
While the gross income metric factors in the direct cost of producing or providing goods and services, it does not include other costs related to selling activities, administration, taxes, and other costs related to running the overall business.
Is social security considered gross income? ›
Additionally, a portion of your Social Security benefits is included in gross income for tax, in any year the sum of half your Social Security benefit plus all of your taxable gross income, plus all of your tax-exempt interest and dividends, exceeds $25,000 if filing single, or $32,000 if you are Married Filing Jointly ...
How do I determine my adjusted gross income? ›
The AGI calculation is relatively straightforward. It is equal to the total income you report that's subject to income tax—such as earnings from your job, self-employment, dividends and interest from a bank account—minus specific deductions, or “adjustments” that you're eligible to take.
What can I use as earned income? ›
Types of Earned Income
- Wages, salary or tips where federal income taxes are withheld on Form W-2, box 1.
- Income from a job where your employer didn't withhold tax (such as gig economy work) including: ...
- Money made from self-employment, including if you: ...
- Benefits from a union strike.
Earned income-in-kind represents compensation received for work performed (employed by another or self-employed) in place of, or in addition to, wages, profit, or payment in cash.
Does Social Security count as earned income for Social Security? ›
Unearned Income is all income that is not earned such as Social Security benefits, pensions, State disability payments, unemployment benefits, interest income, dividends, and cash from friends and relatives. In-Kind Income is food, shelter, or both that you get for free or for less than its fair market value.
Nontaxable income won't be taxed, whether or not you enter it on your tax return. The following items are deemed nontaxable by the IRS: Inheritances, gifts and bequests. Cash rebates on items you purchase from a retailer, manufacturer or dealer.
