3 types of income explained
Some sources of income (like a paycheck) may be obvious. But you might be surprised to learn about other income streams. Depending on how you look at it, there are a lot of ways you could classify types of income. But this article focuses on three relatively basic classifications.
What you’ll learn:
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You can often group income into one of three categories: earned, passive and portfolio.
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Earned income includes wages, salary, tips and commissions.
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Passive or unearned income might come from rental properties, royalties and limited partnerships.
- Portfolio, or investment, income includes interest, dividends and capital gains on investments.
What is income?
In general, income is money you receive from working, providing a good or service, or investing. It’s also commonly measured in cash.
What are the different types of income?
Your paycheck may be the first source of income that comes to mind. But income can take many forms, and you can classify them based on how they’re earned.
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Earned (active) income
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Passive income
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Portfolio income
Understanding earned income
Earned income is money you earn by working—either for yourself, someone else or a business you own. It’s also called “active income” because you perform a service for it. Earned income can take several forms, including:
Wages and salary
If you work for a company, such as a small business or a large corporation, your employer may pay you an hourly wage. Or your employer might pay you in increments based on an annual salary.
Tips, commissions and bonuses
Earned income could also include extra pay above your wages. For example, taxi drivers and restaurant servers can earn tips. And people who work in sales can earn commissions.
Gig economy
Gig work can include independent work, self-employment and part-time jobs. These side hustles might be temporary or seasonal jobs performing a single task on demand. Musicians, babysitters, freelance writers and delivery drivers are all examples of gig workers.
Understanding passive income
Passive income is considered money that you earn without actively working for it. That’s why it’s also called unearned income.
Rental income and income from royalties and limited partnerships are some examples of passive income. Other examples of passive income include:
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Alimony
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Child support
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Unemployment benefits
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Social Security benefits
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Worker’s compensation
Understanding portfolio income
Portfolio income, or investment income, can include interest, dividends and capital gains from securities and other investments. Also called investment income, it’s often thought of as passive income. But the IRS can treat it differently when it comes to taxes.
Savings
Income can come from a bank or credit union that pays interest on account balances. For example, interest can come from savings accounts, money market accounts and certificates of deposit (CDs).
Securities
Investments can take different forms, including stocks, bonds, mutual funds and exchange-traded funds (ETFs). Capital gains can come from selling stocks or cashing out a pension or retirement fund that’s increased in value. And when a company makes money, it can pay a portion of its profits (a dividend) to shareholders.
Types of income FAQ
Learn more about different types of income with the answers to these frequently asked questions.
What is taxable income?
Taxable income can be money, property, goods or services. And unless exempted by law, it must be reported on your tax return.
According to the IRS, most income is taxable.
What is discretionary income?
Discretionary income is the portion of income within your budget you have left to invest, save or spend after you’ve met your necessities. For example, you may use discretionary income on travel and entertainment.
What’s the difference between gross and net income?
In general, gross and net income have to do with your paycheck. Gross income is the total amount of money you earn from your wages, tips, commissions and bonuses. And net income is the amount left over after taxes and deductions, like health insurance or retirement contributions.
Key takeaways: Types of income
There are many types of income you can earn. You can actively work for earned income, or you can let your money work for you in passive income streams. You might also earn income from interest, dividends and capital gains on investments.
The more you know about the different types of income sources, the better you can manage your finances. Digital tools from Capital One can make managing your money even easier with online shopping, credit monitoring, security features and more.
