What is Unearned Income?
Unearned income is an IRS term for income that is not obtained by participating in a business or trade (e.g., salaries and bonuses, wages, commissions and tips). It typically includes interest, dividends, pensions, social security, unemployment benefits, alimony and child support.
How Does Unearned Income Work?
John Doe works in the marketing department for Company XYZ. His salary is $75,000 per year, and this year he also received a $5,000 bonus. His earned income is $75,000 + $5,000 = $80,000.
John Doe also owns some dividend stocks and receives a pension from his first career as a firefighter. He receives $200 a month in dividends and $1,000 a month from his pension. John’s unearned income is $1,200 per month x 12 months = $14,400.
Why Does Unearned Income Matter?
Unearned income is different from earned income, which generally is income that is obtained by participating in a business or trade -- typically, this means salaries and bonuses, wages, commissions and tips. Union strike benefits are also considered earned income, as are long-term disability benefits received prior to minimum retirement age.
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