Earned income, for federal tax purposes including the Earned Income Credit (EIC), generally consists of compensation received for work performed. It includes wages, salaries, tips, and net earnings from self-employment. The IRS definition is primarily governed by IRC §32 and explained in Publication 596 and the Form 1040 Instructions.
Types of Earned Income
- Wages, salaries, and tips: Taxable employee compensation reported in Box 1 of Form W-2, including most taxable fringe benefits.
- Net earnings from self-employment: Net profit from a trade or business after allowable deductions, generally reported on Schedule C (Form 1040), Schedule F, or Schedule SE adjustments.
- Certain disability-related wages: Taxable disability income received before minimum retirement age and reported as wages may qualify as earned income for EIC purposes.
- Statutory employee income: Income reported with “Statutory Employee” checked in Box 13 of Form W-2, reported on Schedule C.
- Union strike benefits and certain taxable sick pay: May qualify when treated as taxable compensation for services.
What Is NOT Considered Earned Income
- Interest and dividends
- Pensions and annuities
- Social Security and railroad retirement benefits (including disability payments)
- Unemployment compensation
- Alimony and child support
- Welfare benefits (including TANF cash assistance)
- Workers’ compensation benefits
- Veterans’ benefits
- Nontaxable foster care payments
- Nontaxable workfare payments
- Nontaxable military allowances (such as BAH and BAS)
- Capital gains
- Rental income not derived from a trade or business in which services are performed
Special Rules and Adjustments
Self-employment adjustment: Net earnings are reduced by the deductible portion of self-employment tax and by contributions to certain retirement plans when determining EIC earned income.
Community property rules: In community property states, only income attributable to actual services performed by the taxpayer counts for EIC purposes in certain filing situations (for example, head of household or certain married filing separately exceptions).
Clergy and religious workers: Special rules apply; net earnings may include housing allowance or fair rental value if subject to self-employment tax, unless exempt under approved exemption rules.
Capital-intensive businesses: If both capital and labor produce income, only the portion attributable to services is treated as earned income for EIC limitation purposes under IRS rules.
Source:
Publication 596 (2025)
Form 1040 Instructions (2025)
Disclaimer: Always verify details with the current year’s official IRS forms and instructions or consult a tax professional for personalized advice.