Earned Income

The key feature of earned income is that it depends on your time and effort. If you stop working, it usually stops too. This sets it apart from investment income, such as interest or dividends, which comes from money or assets you already own.

For an employee, earned income includes the base salary plus extras such as overtime, bonuses and commissions. For a self-employed person, it is the profit from their business after business costs, not the total sales. A freelance designer who bills 60,000 in a year and spends 12,000 on software, equipment and travel has earned income of about 48,000 before tax.

Many tax systems treat earned income differently from investment income. It is often subject to payroll or social security contributions in addition to income tax, and in some countries the rates are different from those charged on capital gains or dividends.

For most people, earned income is the main source of money early in life. A common long-term goal is to use part of it to build savings and investments, so that over time a growing share of income comes from assets rather than from work alone.