Generally, earned income includes taxable employee compensation and net earnings from self-employment, as well as certain disability payments.
There are two ways to get earned income:
You work for someone who pays you
You own or run a business or farm
Taxable earned income includes:
- Wages, salaries, tips, and other taxable employee compensation;
- Union strike benefits;
- Disability retirement benefits received prior to minimum retirement age;
- Net earnings from self-employment if:
Nontaxable Combat Pay election. You may elect to include your nontaxable combat pay in earned income for purposes of the EITC. The amount of your nontaxable combat pay should be shown on your Form W-2, in box 12, with code Q. Electing to include nontaxable combat pay in earned income may increase or decrease your EITC. See Publication 3, Armed Forces Tax Guide, for more information.
Examples of income that are not earned income:
Pay received for work while an inmate in a penal institution
Interest and dividends
Pensions or annuities