We all know that in order to make money, you have to, well, work for it. But did you know that there are different types of income? Granted, some of them are taxable and some of them aren’t, but they’re still technically different types. Here’s a quick run-down of the different types of income and how they’re taxed (or not taxed) in the United States.
Wages
Wages are what you earn from working an hourly or salaried job. Basically, if your paycheck has “wages” listed as income, that’s what it is—the money you earned from working. Wages are fully taxable, so be sure to have the proper amount withheld from your paycheck so you don’t end up owing the government come tax season. If you don’t withhold enough, you will be charged a penalty plus interest. Not fun.
Tips
If you work in a service industry such as bartending or waitressing, chances are good that you receive tips as part of your compensation.
Tips are considered taxable wages, so they must be reported as income on your tax return. Be sure to keep track of your tips throughout the year so you don’t under-report your income and end up owing taxes (plus penalties and interest) come tax time.
Investment Income
If you have money invested in stocks, bonds, mutual funds, or real estate, any money that those investments earn is considered investment income. This can include interest earned on savings accounts or CDs as well. Investment income is taxed at your marginal tax rate (more on that below), so it’s important to keep good records of your investment activity throughout the year.
Royalties
Royalties are payments made to someone for the use of their property or intellectual property, such as patents, copyrights, or natural resources. For example, if someone wants to use one of your copyrighted photographs, they would need to pay you a royalty fee in order for that use to be legal. Like investment income, royalties are taxed at your marginal tax rate.
Gains from the Sale of Property
This one is a bit self-explanatory; if you sell something that you own for more than it cost you to acquire it (a “capital gain”), then that amount is considered taxable income. For example, if you buy a stock for $10 per share and sell it later for $15 per share, then you have a $5 capital gain that must be reported on your tax return. Capital gains may also be subject to state taxes depending on where you live—so be sure to check with your state tax agency for more information.
As you can see, there are different types of income, which means there are different rules regarding taxes. It’s important to keep good records throughout the year, so come tax season; you’re prepared and know exactly what needs to be done! Stay informed and stay safe.