Measure content performance. Develop and improve products. List of Partners vendors. Income is money that a person or a business receives in return for working, providing a product or service, or investing capital. A person's income may also derive from a pension, a government benefit, or a gift. To a government tax agency, income may be taxable, tax-exempt, or tax-reduced.
To an economist, income may be disposable or discretionary. For most of us, income is the money we use to fund our day-to-day expenditures. The income may be received in the form of wages, salary, freelance payments, or the receipts of a small business. Investments, pensions, Social Security , and other government benefits programs may also be sources of income. Some receive income through trust funds or cash gifts from family.
Business income can refer to a company's remaining revenues after paying all expenses and taxes. In this case, income is referred to as earnings. Most forms of income are subject to taxation by local, state, and federal governments. Individuals receive income through earning wages by working and making investments in financial assets such as stocks, bonds, and real estate.
An individual may also inherit income. Most of the above types of income are taxable income, although the tax rates vary, some portions of the income may be tax-exempt, and the rules can be mind-numbingly complex. In the U. The revenue generated by income taxes finances government activities and programs as dictated by federal and state budgets. The Internal Revenue Service IRS calls income from sources other than a job, such as investment income, unearned income.
Income from wages, salaries, interest, dividends, business income, capital gains, and pensions received during a given tax year are considered taxable income in the United States.
Other taxable income includes annuity payments, rental income, farming, and fishing income, unemployment compensation , retirement plan distributions, and stock options.
Lesser-known types of taxable income include gambling income, bartering income, and jury duty pay. The types of income listed above would be classified as ordinary income, which is composed mainly of wages, salaries, commissions, and interest income from bonds.
Ordinary income is taxable using so-called ordinary income rates. This type of income differs from capital gains or dividend income in that it can only be offset with standard tax deductions, while capital gains can only be offset with capital losses.
Types of income that may be tax-exempt include interest income from U. Treasury securities which is exempt at the state and local levels , interest from municipal bonds which are not always exempt at all three of those levels , and capital gains that are offset by capital losses.
Types of income taxed at lower rates include qualified dividends and long-term capital gains. Social Security income is taxable if the recipient has other income above certain levels. Disposable income is generally defined as the cash that remains after taxes are paid. Individuals spend their disposable income on necessities such as housing, food, and transportation. Discretionary income is the money that remains after paying both taxes and all of those necessary expenses. Discretionary income is spent on nonessentials like vacations, restaurant meals, cable television, and movies.
In a recession, individuals tend to be more prudent with their discretionary income. A family may use its discretionary income to make extra payments on a mortgage or save it for an unexpected expense. Disposable income is higher than discretionary income within the same household because the expenses of necessary items are not removed from disposable income. Most streams of income are taxed by the government, and tax rates may vary depending on where your money is coming from and how much you're making per year.
It's important to understand how taxes might affect alternative streams of income so you can successfully prepare for the future and calculate potential financial risks before they occur. Here are some factors to consider when it comes to paying taxes on the different types of income:. The revenue generated by income taxes is typically used to finance government actions and programs depending on federal and state budgets. Income tax rates vary based on how much money you make in one calendar year.
Individuals with lower salaries are typically taxed at lower rates than higher-income taxpayers, and tax rates may change over time if there's a pay increase. For example, if you receive a promotion and pay raise, your income tax rates will increase accordingly depending on your yearly salary and tax bracket. Portfolio income, or any money you make from dividends, capital gains or interest, is usually taxed at a lower rate than earned income.
Portfolio income is not subject to Social Security or Medicare taxes. Like income tax rates, the amount you owe depends on how much money you're making from each stream of revenue annually. Tax rates on each type of passive income vary based on how long your investments are held and the amount of profit earned. Capital gains from short-term investments are typically taxed at a higher rate than long-term ones.
Find jobs. Company reviews. Find salaries. Upload your resume. Sign in. Career Development. What is income? Why is it important to understand the different types of income? There are two types of income stream, active and passive. Your business is most likely using an active income stream. This is where you do some work or provide a service, and someone pays you for it. Very simple and a direct connection between the work and payment.
Passive income is where the income is not directly tied to the work you do. Although it says passive income, there is still work required to generate the revenue. In general, the work needed for a passive income stream takes place early on, and the income comes later. An excellent example of this is an online store. The work at the beginning is to build the website, upload your products, and then promote them. The passive income comes later as people begin to buy products from your store. Big business has been diversifying its income streams for centuries.
They expand their business operations into different sectors to generate new streams of income. Almost any company can diversify. A flower shop can develop a separate wedding flower business, for example, or offer mail order. The most potent diversification is into a completely new business sector. But that takes a lot of effort and expense. An excellent study of a company that has grown and diversified is the Virgin Group.
Initially started by Sir Richard Branson as a record label, Virgin has since expanded into aviation, holidays, mobile telephony, and much more. An example of a good way for an electrician to find other streams of income is to work with property management companies. His core business may currently be private homeowners, but management companies often need additional tradespeople. Another route could be to start offering courses to people on basic electrics and how to stay safe with electricity.
Aside from diversification, there are other ways to generate income known as the seven streams of income;. Many of these are not available to everyone. You need to have money already to benefit from some of these income streams. Earned income is your primary income stream through a job.
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