Earned Income vs. Unearned Income: What’s the Difference?

The main difference between earned income and unearned income is that earned income provides a sense of accomplishment and purpose whereas unearned income can lead to complacency and entitlement.

Before we move to more differences, let’s first understand Earned Income and Unearned Income:

  • Earned Income: Earned income is the income that an individual receives as compensation for work or services performed.
  • Unearned Income: Unearned income is income that is not earned through active participation or work, but rather through investments or other passive sources of income, such as rental income, stock dividends, capital gains, or interest income.

Now, let’s get to Earned Income vs Unearned Income:

Major differences between Earned Income and Unearned Income

Earned Income Unearned Income
Earned Income is subject to payroll and income taxation. Unearned Income may be taxed differently depending on the type of income.
Earned Income can be affected by factors such as performance, productivity, and market demand. Unearned income is more dependent on investment returns.
Earned income is often consistent and predictable. Unearned Income can vary depending on investment fluctuations.
Earned income plays an important role in Social Security and other government benefit programs. Unearned income does not affect eligibility for these programs.
Earned Income is generated through active participation in labor or work. Unearned Income is generated from passive activities or investments.

So, these are the main differences between the entities.

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