Earned income, as the name implies, is connected with some type of labor that is performed in exchange for money. It includes salaries, wages, tips, and net earnings from a business for those who are self-employed. Unearned income is not connected to labor and is generated in other ways. Examples include gifts, inheritances, contest or gambling prizes, and interest, dividends, and capital gains from savings and investments. A third category of income is benefit/societal income, which includes transfer payments such as Social Security and disability payments, food stamps, unemployment benefits, and charitable services. Consult the Internal Revenue Service Publication 525, "Taxable and Nontaxable Income," for specific information about federal income tax liability.
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