Earned Income Calculator
Estimated Annual Earned Income:
Understanding Earned Income: A Comprehensive Guide
Earned income is a critical metric for tax filing, loan applications, and qualification for various government credits like the Earned Income Tax Credit (EITC). Unlike passive income (such as dividends or rental income), earned income represents the compensation you receive for active work and services rendered.
What Qualifies as Earned Income?
The IRS and most financial institutions categorize the following as earned income:
- Wages, Salaries, and Tips: The gross amount paid by an employer before taxes are withheld.
- Commission and Bonuses: Performance-based pay and year-end incentives.
- Union Strike Benefits: Payments received from a union while on strike.
- Self-Employment Income: Net earnings from a business you own or operate as a freelancer or contractor.
- Long-term Disability Benefits: Only if received before reaching the minimum retirement age.
How to Use the Earned Income Calculator
This tool is designed to provide a holistic view of your active compensation. To get an accurate result, follow these steps:
- Enter your Hourly Wage: Use your base pay before any deductions.
- Determine your Hours: Input your average weekly hours (e.g., 40 for full-time).
- Include Additional Compensation: Add any annual bonuses or tips you expect throughout the year.
- Self-Employment: If you have a side hustle, enter your net profit (revenue minus business expenses).
Example Calculation
Let's look at a realistic scenario for a freelance graphic designer who also works part-time at a studio:
- Part-time Job: $30/hr × 20 hours/week × 50 weeks = $30,000
- Annual Bonus: $1,500
- Freelance Net Profit: $12,000
- Total Earned Income: $30,000 + $1,500 + $12,000 = $43,500
Why This Calculation Matters
Knowing your exact earned income helps in retirement planning, specifically for contributing to an IRA. You generally cannot contribute more to an IRA than your total earned income for the year. Additionally, it helps you estimate your tax bracket early in the year, allowing for better financial preparation.