U.S. tax law divides income into two primary categories: earned and unearned.
Earned income is compensation received for services performed, including wages, salaries, bonuses, commissions, tips, and net earnings from self-employment. It also includes long-term disability benefits, union strike benefits, and certain deferred compensation payments.
Regular employee compensation. Typically subject to federal, state, and local income taxes, plus Social Security and Medicare taxes (collectively known as FICA). References: IRS Pub. 15, “Employer’s Tax Guide”, IRS Pub. 17, “Your Federal Income Tax”.
Performance-based compensation. Often paid in cash or equity instruments such as restricted stock units (RSUs) or stock options. Taxed as ordinary income upon receipt or exercise. References: IRS Topic No. 401 - Wages and Salaries, IRS Pub. 525, “Taxable and Nontaxable Income”.
Earnings from operating a business as a sole proprietor or independent contractor. Reported on Schedule C of Form 1040, often following receipt of Form 1099-NEC. Subject to self-employment tax under IRC §1401 but eligible for business deductions. References: IRS Schedule C, Form 1099-NEC, IRS Guide to Business Expense Resources.
Income from activities not engaged in for profit. Reported on Form 1040 as miscellaneous income. Unlike self-employment income, hobby income is exempt from self-employment tax. However, under the Tax Cuts and Jobs Act (TCJA), hobby expenses are non-deductible, meaning gross receipts are taxed without offset.
Profits distributed from entities like LLCs or S corporations. Taxed at individual shareholder rates rather than the corporate level. Reference: Form 1120-S, U.S. Income Tax Return for an S Corporation | www.irs.gov/forms-pubs/about-form-1120-s.
Payments for professional services rendered nominally without charge, such as academic lectures. Subject to ordinary income tax. Reference: IRS Pub. 525, “Taxable and Nontaxable Income”.
Income from agricultural or commercial fishing operations. Eligible for income averaging and a relaxed estimated-tax schedule unavailable to other trades (section “Farming and Fishing Income”). References: IRS Pub. 225, “Farmer’s Tax Guide”, Schedule F (Form 1040).
Performance- or service-based gratuities. Subject to income tax and FICA. References: IRS Topic No. 761, IRS Pub. 531, “Reporting Tip Income”.
Taxability turns on who paid the premiums: benefits from employer-paid or pre-tax premiums are taxable, while benefits from premiums you paid with after-tax dollars are tax-free. Reference: IRS Pub. 525, “Taxable and Nontaxable Income”.
Payments from a union strike fund are taxable as ordinary income, unless paid solely on the basis of need and intended as a gift. Reference: IRS Pub. 525, “Taxable and Nontaxable Income”.
Wages earned now but received in a later year. Taxed when paid or when no longer subject to a substantial risk of forfeiture, not when earned. Non-qualified plans under IRC §409A are covered later in this chapter.
Unearned income is income not derived from active labor. It includes investment income (interest, dividends, capital gains), rental income, royalties, annuities, retirement and Social Security distributions, and miscellaneous receipts such as alimony, cancelled debt, gambling winnings, legal settlements, gifts, and inheritances.
Earnings from bank accounts, certificates of deposit (CDs), or bonds. Taxed as ordinary income unless generated by municipal bonds. References: Form 1099-INT, IRS Pub. 550, “Investment Income and Expenses”.
Profits from the sale of capital assets like equities or real estate. Subject to capital gains rates under IRC §1, which are lower for long-term holdings (assets held over one year) than short-term holdings (taxed as ordinary income). Reference: Schedule D (Form 1040).
Corporate distributions to shareholders. Qualified dividends are taxed at capital gains rates, while ordinary dividends are taxed at ordinary income rates. References: Form 1099-DIV, IRS Pub. 550, “Investment Income and Expenses”.
Net revenues from leasing real estate. Reported on Schedule E, allowing deductions for depreciation, mortgage interest, and property taxes; the passive-loss, personal-use, and recapture nuances are in section “Rental Income”. References: Schedule E (Form 1040), IRS Pub. 527, “Residential Rental Property”.
Income from licensing intellectual property, patents, copyrighted works, or natural resource extraction rights (such as oil and gas leases). Reported on Schedule E and taxed as ordinary income, unless the taxpayer is in the business of creating or selling the underlying assets, in which case it is Schedule C earned income.
Periodic payments from insurance or investment contracts. Tax treatment depends on whether the annuity was funded with pre-tax or after-tax dollars. Reference: IRS Pub. 939, “General Rule for Pensions and Annuities”.
Withdrawals from pensions, traditional IRAs, and 401(k)-type accounts. Pre-tax contributions and their earnings are taxed as ordinary income on distribution; qualified Roth distributions are tax-free (section “Roth IRA”). Sequencing these withdrawals is the subject of chapter “Tax-Efficient Decumulation”.
Up to 85% of benefits are included in taxable income once provisional income crosses statutory thresholds (section “The Social Security Tax Torpedo”). Reported on Form SSA-1099.
For divorce or separation agreements executed after December 31, 2018, alimony is neither deductible by the payer nor taxable to the recipient; pre-2019 agreements remain under the old inclusion-and-deduction regime (section “Alimony After the TCJA”).
Forgiven debt is taxable as ordinary income under IRC §108, “Income from discharge of indebtedness” and reported on Form 1099-C, unless an exclusion applies — insolvency, Title 11 bankruptcy (section “Bankruptcy”), or qualified principal-residence indebtedness.
Taxable as ordinary income, reported on Form W-2G with 24% withholding above threshold payouts. Losses are deductible only if you itemize and only against winnings — and the OBBBA caps the loss deduction at 90% of losses beginning in 2026, so a break-even year can still generate taxable income.
Recoveries for physical injury or sickness are excluded under IRC §104, “Compensation for injuries or sickness”; punitive damages, interest, lost wages, and most emotional-distress awards are taxable. Contingent legal fees are generally not deductible, so the plaintiff can owe tax on the attorney’s share.
Tokens received from staking, mining, or rewards are ordinary income at fair market value on receipt, establishing basis; a later sale is a capital gain or loss. Every Form 1040 requires answering the digital-asset question.
Fully taxable as ordinary income and reported on Form 1099-G; no FICA applies.
Not taxable income to the recipient under IRC §102, “Gifts and inheritances”. Any transfer tax falls on the giver or the estate, not the beneficiary (chapter “Estate planning”). Income subsequently earned on inherited assets is, of course, taxable.
Tax-free under IRC §117, “Qualified scholarships” to the extent used for tuition and required fees, books, and supplies; amounts spent on room, board, or travel, and any portion that is payment for teaching or research, are taxable. The dependency and reporting mechanics are in section “Scholarships, Fellowships, and Dependency”.