Earned income is the total taxable compensation (e.g. wages or salaries) earned for work by an employee or the net income earned by a self-employed individual.
In simple, earned income is any form of payment you receive from a job or self-employment, i.e., your own business.
The only type of compensation that contributes to earned income is not regular salaries.
A list of various earned revenues is mentioned-below:
- Salaries and wages, including pay for holidays.
- Bonuses, tips, and commissions. If your company gives you a dividend or commission, you must pay tax on it.
- Profits from self-employment (although you may not have to pay any tax due to the trading allowance if your total self-employment income is less than £ 1,000)
- Occupational pensions, private pensions, personal pension plans or retirement annuity programs
- Union strike benefits
- Disability retirement benefits that re received before the minimum age of retirement
- Certain benefits-in-kind also referred to like the perks of your job. (company cars, medical insurance)
Other earned income sources
- Reimbursed costs incurred entirely, solely and inevitably to do or while doing your work, but are covered by your employer.
- Payments for redundancy/termination of over £ 30,000
- Various statutory payments, like statutory paternity and maternity pay, statutory sick pay.
- Various vouchers that are traded for cash such as gift vouchers.
Example of earned income
Let’s assume Jack works in the sales department for ABC company. His salary is £ 85,000 per year, and he has also received a £ 10,000 bonus.
So, his earned income is £ 85,000 + £ 10,000 = £ 1,05,000.
Earned income is subject to taxes on employment. An individual must be aware of the amount of earned income subject to taxation to determine his tax liability or if you’re an employer, then employee’s tax liability.
Employment taxes include income such as Medicare taxes and Social Security, in an employee’s case. Earned income is subject to income tax and self-employment tax in the case of a self-employed individual.
On the contrary, earned income does not include interest earned on a bank account, dividends from investment, social security, capital gains, unemployment benefits, real estate income and child support/alimony.