Earned income, as defined by the IRS, includes wages, salaries, tips, and other taxable employee pay, as well as net earnings from self-employment. For employees, earned income consists of all taxable compensation received from an employer. For self-employed individuals, earned income is calculated as net earnings from self-employment, which is the gross income minus allowable business expenses, as reported on Schedule C or F. Statutory employees, who receive a Form W-2 with box 13 checked, also report their income as earned income on Schedule C.
Types of Earned Income
- Wages, salaries, and tips: All taxable employee compensation reported on Form W-2, box 1.
- Net earnings from self-employment: Gross income minus allowable business expenses for self-employed individuals, ministers, or members of religious orders.
- Statutory employees: Individuals who receive a Form W-2 with box 13 checked and report income on Schedule C.
- Other types: Household employee wages, tip income not reported to employer, certain Medicaid waiver payments (if chosen to include), taxable dependent care benefits, employer-provided adoption benefits (from Form 8839), and wages from Form 8919.
What Is NOT Considered Earned Income
- Interest and dividends
- Pensions and annuities
- Social Security and railroad retirement benefits (including disability)
- Alimony and child support
- Welfare benefits
- Workers’ compensation
- Unemployment compensation
- Nontaxable foster care payments
- Veterans’ benefits (including VA rehabilitation payments)
- Workfare payments (nontaxable cash payments for work activities under TANF programs)
- Community property income earned by a spouse in community property states, if you file as head of household or married filing separately under special rules
Special Rules for Certain Groups
- Ministers and clergy: The rental value of housing or housing allowance is generally not taxable but is included in net earnings from self-employment and thus qualifies as earned income for EIC purposes unless an approved Form 4361 or Form 4029 applies.
- Self-employed with capital involvement: If both personal services and capital are material income-producing factors in an unincorporated business, earned income is limited to no more than 30% of net profits after subtracting the employer-equivalent portion of self-employment tax. If capital is not a material factor, the entire gross income is considered earned income.
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.