Careers Business Ownership How Does Earned Income Affect My Taxes? For Employees and the Self-Employed Share PINTEREST Email Print blueduck/Getty Images Business Ownership Operations & Success Business Law & Taxes Sustainable Businesses Supply Chain Management Operations & Technology Marketing Market Research Business Insurance Business Finance Accounting Industries Becoming an Owner By Jean Murray Jean Murray Jean Murray, MBA, Ph.D., is an experienced business writer and teacher. She has taught at business and professional schools for over 35 years. Learn about our Editorial Process Updated on 04/29/21 Individuals and businesses have two types of income. One type is active income; that is, income from active work as an employee or self-employed individual. The other type is passive income. Investment income, for example, is considered passive. Passive income also includes income from rentals and from internet marketing ideas. This article focuses on active, earned income and the tax implications of receiving earned income. You may have income from other passive sources, so earned income is not equal your adjusted gross income or your gross income for income tax calculation purposes. What Is Earned Income? Earned income is taxable income and wages you get from working. It includes: Wages, salary, or tips you earn from working for someone else, or as an employeeIncome from your work in a business you own Earned income does not include: Interest and dividendsPension and retirement benefitsSocial SecurityUnemployment benefitsAlimony or child support How Earned Income Affects Your Tax Return Both types of earned income (as an employee and as a small business owner) are taxable. In addition, all passive income you receive is also taxable, just on a different part of your tax return. Earned Income as an Employee Earned income as an employee includes not only wages, salaries, and tips, but also: Commissions and bonusesMost employee benefitsLong-term disability benefits paid to you before your minimum retirement age, andStrike benefitsIncome as a statutory employee(taxed as self-employed) If you are an employee of another business, or you work as an employee in your corporation, you are taxed on your gross earned income for the year. Earned Income as a Self-Employed Business Owner If you work for yourself, and by yourself, in a small business, you must file a business tax return, usually on Schedule C. The net income you report from this business (gross income minus deductible business expenses) is considered your earned income from the business that year. The income you take in as net income is considered to be earned income: Income Taxes: Your net income from your business is included on your tax return in addition to earned income from other sources, to determine your total income tax bill. Self-Employment Taxes: If your business has a positive net income, or profit, for the year, that net income is used to calculate self-employment taxes (Social Security and Medicare taxes). This tax is added to your income tax on your personal tax return.S Corporation Shareholder: If you were a more-than-2% shareholder in the S corporation under which the insurance plan is established, earned income is your Medicare wages (box 5 of Form W-2) from that corporation. The Earned Income Tax Credit The earned income tax credit (EITC) is a refundable tax credit available to lower-income individuals and families. The credit is based on total earned income for a year, hence the name. The American Rescue Plan Act, which was passed in March 2021, expanded eligibility for the Earned Income Tax Credit in response to the COVID-19 pandemic. In 2021, more households will qualify for this credit, even if their income was too high to qualify in previous years. This includes:More childless householdsTaxpayers over age 65Taxpayers ages 19-25 who are not full-time students Some state and local governments also have earned income tax credits available or match the federal credit. Foreign Earned Income Tax Exclusion If you live and work outside the U.S., some or all of your income may be eligible to be excluded from your earned income.