What's the Difference Between Earned Income and Unearned Income?

The IRS distinguishes between earned income and unearned income, and the distinction affects which tax rules and credits apply. Earned income is money you receive in exchange for work — wages, salaries, tips, self-employment income, and union strike benefits are all earned income. Unearned income is money that comes from sources other than work, such as interest, dividends, capital gains, rental income, pension payments, and Social Security benefits. The Earned Income Credit is only available to people with earned income, while investment income above a small threshold disqualifies you from claiming it. Unearned income received by minors can trigger the kiddie tax, which taxes a child's unearned income above a threshold at the parents' tax rate. Self-employment income is earned income and subject to self-employment tax, while most unearned income is not subject to payroll taxes but may be subject to the Net Investment Income Tax for higher earners.