Earned income is the income that an individual receives in exchange for the labor or services they provide. This contrasts with unearned income, which comes from investments, properties, or other sources not directly tied to active work.
Historical Context
The distinction between earned and unearned income dates back to early economic theories and tax regulations. Historically, earned income has been perceived as the fundamental form of revenue for individuals, forming the backbone of labor economies.
Types/Categories of Earned Income
Earned income can be broadly categorized into:
- Wages: Payments received by employees for their labor, often hourly or salaried.
- Salaries: Regular payment, typically monthly or bi-weekly, not based on hours worked.
- Tips: Gratuities given by customers in service industries.
- Commissions: Payments based on a percentage of sales or completed deals.
- Bonuses: Additional financial incentives awarded for performance.
- Self-Employment Income: Profits earned by individuals running their own businesses or freelancing.
- Military Pay: Compensation for armed forces personnel.
- Union Strikes Benefits: Payments received from unions during strikes.
Key Events and Regulatory Changes
- 1862: The United States introduces the income tax system, initially to fund the Civil War, with earned income taxed alongside other income types.
- 1913: The 16th Amendment establishes a federal income tax, formalizing the distinction between earned and unearned income.
- 1986: The Tax Reform Act of 1986 further clarifies and differentiates between earned and unearned income, impacting how each is taxed.
Mathematical Formulas/Models
In economics and personal finance, several models and formulas can relate to earned income, particularly in taxation:
-
Income Tax Calculation Formula:
$$ \text{Taxable Income} = \text{Gross Earned Income} - \text{Deductions} $$$$ \text{Taxes Owed} = \text{Taxable Income} \times \text{Tax Rate} $$
Charts and Diagrams
graph TD
A[Earned Income] --> B1[Wages]
A --> B2[Salaries]
A --> B3[Tips]
A --> B4[Commissions]
A --> B5[Bonuses]
A --> B6[Self-Employment]
A --> B7[Military Pay]
A --> B8[Union Strike Benefits]
Importance and Applicability
Earned income is essential because it:
- Reflects the active participation in the labor market.
- Is a primary source of revenue for most individuals.
- Determines social security benefits and retirement savings contributions.
- Forms the basis for individual taxation and national GDP assessments.
Examples
- Hourly Wages: A factory worker earning $20 per hour.
- Salaries: An office manager with an annual salary of $60,000.
- Commissions: A real estate agent earning 3% per home sale.
- Bonuses: A financial analyst receiving a year-end bonus based on company performance.
Considerations
When assessing earned income, consider:
- Taxation: Earned income is subject to different tax brackets and potential deductions.
- Employment Benefits: Certain jobs include benefits like health insurance or retirement plans.
- Work-Life Balance: The nature of earned income jobs can impact personal life and stress levels.
Related Terms with Definitions
- Unearned Income: Income from sources such as dividends, interest, or rent.
- Taxable Income: The amount of income that is subject to taxation after deductions and exemptions.
- Gross Income: The total income earned before deductions.
- Net Income: The income remaining after all taxes and deductions have been taken out.
Comparisons
Earned Income vs. Unearned Income:
- Earned Income: Directly from work, actively involved, subject to payroll taxes.
- Unearned Income: From investments, passive involvement, often taxed differently.
Interesting Facts
- In many countries, earned income is taxed at a higher rate than unearned income.
- Social Security benefits in the U.S. are calculated based on lifetime earned income.
Inspirational Stories
- From Rags to Riches: Oprah Winfrey, who started with very modest means, earned her way to becoming one of the wealthiest and most influential women through her work in media.
Famous Quotes
- “Choose a job you love, and you will never have to work a day in your life.” - Confucius
Proverbs and Clichés
- Proverbs: “Hard work pays off.”
- Clichés: “You reap what you sow.”
Expressions, Jargon, and Slang
- Expressions: “To earn a living,” “making ends meet.”
- Jargon: “Gross earnings,” “net pay,” “take-home pay.”
- Slang: “Bringing home the bacon,” “making bank.”
FAQs
Is earned income the same as gross income?
How is earned income taxed?
References
- Internal Revenue Service (IRS)
- Bureau of Labor Statistics (BLS)
- “Tax Reform Act of 1986”. U.S. Government Printing Office.
Summary
Earned income is a critical component of personal finance and economics, encompassing wages, salaries, tips, commissions, bonuses, self-employment income, and more. It is essential for understanding taxation, economic contribution, and social security benefits. Differentiating it from unearned income highlights its direct connection to labor and productivity. By grasping its various forms, implications, and historical context, individuals can better manage their finances and understand the broader economic landscape.
