What Counts as Each Type

Earned: wages, salaries, tips, commissions, and net self-employment income Earned: taxable scholarship amounts used for living expenses and combat pay Unearned: dividends, interest, capital gains, rental income, and royalties Unearned: pension withdrawals, Social Security benefits, and annuity distributions

Social Security and Retirement Eligibility

Only earned income counts toward Social Security credits and benefit calculations The 2025 Social Security wage base is $176,100 for the 6.2% OASDI tax IRA contributions require earned income at least equal to the contribution amount 401(k) deferrals require W-2 wages or self-employment income to participate

Self-employment tax is 15.3%: 12.4% Social Security plus 2.9% Medicare Applies to net self-employment income above $400 per year Half of SE tax is deductible as an above-the-line adjustment on Form 1040 S-corp election can reduce SE tax by splitting income into salary and distributions

Kiddie Tax on Unearned Income

Children under 19 or full-time students under 24 face the kiddie tax rules First $1,350 of unearned income is tax-free; next $1,350 taxed at child's rate (2025) Unearned income above $2,700 is taxed at the parent's marginal rate (2025) Earned income from a child's job is taxed at the child's own lower rate

EITC and Medicare Surtaxes

The EITC requires earned income and can be worth up to $7,830 for large families The 0.9% additional Medicare tax applies to earned income above $200K or $250K joint The 3.8% net investment income tax applies to unearned income above those thresholds Spousal IRA allows a non-working spouse to contribute based on the other's earnings

Earned income drives payroll taxes, Social Security credits, and retirement eligibility Unearned income faces no payroll tax but is subject to the 3.8% NIIT above thresholds Understand which income type you generate to plan contributions and credits properly Consult a qualified tax advisor to optimize your mix of earned and unearned income

Earned Income vs Unearned Income

Curated by: Rubric Advisors

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Earned vs Unearned Income Overview

Earned income results from personal labor or active business participation
Unearned income comes from investments, pensions, and other non-work sources
The distinction affects payroll taxes, retirement eligibility, and tax credits
Both types are reported differently on your federal tax return

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Earned vs Unearned Income Overview

What Counts as Each Type

Social Security and Retirement Eligibility

Self-Employment Tax

Kiddie Tax on Unearned Income

EITC and Medicare Surtaxes

Key Takeaways

Related Topics

Kiddie Tax Rules: What Parents and Grandparents Need to Know

Estimated Tax Payments

Net Investment Income Tax (NIIT) & Medicare Surtax

Earned vs Unearned Income Overview

What Counts as Each Type

Social Security and Retirement Eligibility

Self-Employment Tax

Kiddie Tax on Unearned Income

EITC and Medicare Surtaxes

Key Takeaways

Related Topics

Kiddie Tax Rules: What Parents and Grandparents Need to Know

Estimated Tax Payments

Net Investment Income Tax (NIIT) & Medicare Surtax