Earned income refers to the money an individual earns from working for an employer, running a business or providing a service. It is considered compensation for the labor or services provided by the individual. Examples of earned income include salaries, wages, bonuses, commissions, and tips.
Unearned income, on the other hand, is income that is not directly earned through labor or services provided. Instead, it comes from investments, government benefits, or other sources of passive income. Examples of unearned income include interest income, dividends, rental income, capital gains, and social security benefits.
One of the main differences between earned and unearned income is how they are taxed. Earned income is generally subject to payroll taxes, which includes Social Security and Medicare taxes, while unearned income is generally taxed at a different rate than earned income. Another difference is that earned income is more closely tied to an individual's skills, effort, and work output, while unearned income is often influenced by factors such as market conditions, investment decisions, and government policies.