Different Sources of Income

Income doesn't just come from one source. There are different types of income, and understanding them can help you make better investment decisions, plan for a secure financial future and avoid common pitfalls. Take a look at this article to understand the different income sources you can expect.

Earned Income

Earned income is the most common type of income. It comes from a job where you receive a salary for completing tasks set out in a contract.

Earned income is money you get from working a job, self-employment, or government benefits. It includes wages, salaries, tips, 401(k) compensation, and sales generated from your business.

It's different from unearned income, which comes from interest and dividends from investments, pensions, Social Security payments, alimony, and child support. Earned income is taxed differently than unearned income, so the tax credit for earned income can help you keep more of your hard-earned cash.

The earned income tax credit, also known as EITC or ERTC, is a valuable refundable credit that can lower your federal income tax bill. The amount of the credit depends on your tax filing status, income, and the number of children.

The earned income credit is a highly valuable benefit for low-income workers, but it can be difficult to claim. Check with a tax professional to find out if you qualify. It can save you a lot of money in the long run.

Business Income

Business income is earned by businesses in a variety of ways. It can include selling products and services to customers, as well as receiving fees for professional practice or rents from real estate.

The amount of business income depends on how the business is operated. It's typically calculated by calculating sales and subtracting the cost of goods sold or expenses paid for operations.

This is called "gross income." It's reported on a company's tax return. It is usually taxable and may be offset by business expenses and losses.

Some business owners add actual loss sustained coverage to their business income insurance policy. This adds an extra layer of protection to cover lost net income for a set period of time, often a year. Click here to know more about the business income.

Interest Income

Interest income is earned on various types of investments that pay interest. This includes savings accounts, certificates of deposit (CDs), bonds, money market products, and certain mutual funds or ETFs that pay "interest dividends."

Most interest income is taxable. It is reported on Form 1099-INT, typically sent by the financial institution where you earned the interest, such as a bank or credit union.

If the interest income exceeds $10, it is required to be reported on your tax return. It is also important to report any taxable, tax-exempt interest you receive, even if you do not receive a Form 1099-INT.

Other forms of income, such as the penalties paid by customers on overdue accounts receivable, are also considered to be interest income. This is because the payments are based on using the company's funds, like accounts receivable. Some companies prefer to designate this type of income as penalty income rather than interest income.

Dividend Income

Dividend income can be earned from stocks, mutual funds, and exchange-traded funds (ETFs). These can help you earn more dividends and increase your portfolio's total income.

Companies pay dividends as a way to reward shareholders and increase their share prices. Regular dividend payments also boost investors' confidence in a company's future.

Some companies are regarded as dividend aristocrats, with a history of increasing their dividend payments over a long period. These companies are often mature and past their best growth periods, but they are still stable enough to provide consistent income for investors.

One of the easiest ways to earn dividends is through a dividend-focused stock portfolio. By adding a handful of well-established, high-quality companies, you can ensure you receive dividend payouts every single week.