Quick guide

Earned income: what is it and why does it matter

Last updated:

December 8, 2022

As you begin learning about taxes and tax credits you may have read about credits needing “earned income”.  “Earned Income” is a term used by the IRS to describe money that you made through “sweat and toil” as they like to say.  What that means for the rest of us, is that you had to work for the money, usually through working a job and receiving a W-2, or being self-employed and receiving cash or a 1099-NEC.  Some common examples of self-employment are gig work (Uber, Lyft, Doordash), child care, landscaping, hair styling, etc.

The flipside is “unearned income”.  “Unearned Income” is money that you made without working such as unemployment, scholarships, interest from a bank account, the sale of stocks or bonds, lottery or gambling winnings.  

While both earned and unearned income that was received can be taxed for many credits like the Earned Income Credit and the Child Tax Credit require earned income as part of their eligibility.  Even if you did not receive much earned income and don’t owe any income taxes, it may still be in your interest to file your tax return so you can take advantage of these credits.