Taxes on Earned Income vs. Unearned Income

If you’ve been filing taxes, then you are probably already aware that there is a difference between “earned income” and “unearned income.”    

To put it simply, earned income is any money that you make from working, such as and including wages, tips, and salaries. It also includes union strike benefits, long-term disability benefits (in some cases), and more.

Unearned income, on the other hand, is money that you get not from working but from investments or through chance. Things like annuity payments, retirement account distributions, interest income, alimony, bond interest, and more all count as unearned income.

While earned and unearned income are obviously different, both are subject to being taxed, and it is important to understand the basics of taxation as they relate to both types of income.

Earned Income

When it comes to earned income, you will typically have to pay both social security/medicare taxes, as well as federal and state income taxes.

Your social security tax is based on your earned income up to your contribution and benefit base while Medicare tax is 2.9% of your wages.

Your state income taxes will vary based on a number of factors.

Unearned Income
Fortunately, when it comes to unearned income, you don’t have to worry about payroll taxes. You do, however, need to count any unearned income in your adjusted gross income, which will, in turn, be taxed.

As you can see, no matter what type or types of income you are dealing with/have, taxes are going to happen. To help make these taxes as low as they possibly can be and to receive maximum tax benefits all around, be sure that you hire a tax professional to work on your side! This can make all the difference when it comes to paying less money in taxes, no matter what your income type or types.