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Category: Tax
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What is the difference between ordinary income and earned

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What is the difference between ordinary income and earned income.
Is one type of income taxed differently? I have a sub S co. and receive the profit as ordinary income. I also received earned income in a weekly pay with withholding.

Thank You
Submitted: 6 years ago.
Category: Tax
Expert:  CGCPA replied 6 years ago.

Welcome to Just Answer. I am here to help you resolve your tax and finance concerns. Please feel free to ask anytime you need extra help.


Earned income is labeled by the IRS as income earned from work. Any other income is ordinary income. There are also special treatment given to certain types of income such as Social Security benefits, capital gains, etc but these are all ordinary income.


If you look at your pay stub you will see that there are two types of taxes withheld from earned income (Social Security and Medicare) that are not taken against any other type of income. Self employed persons also pay these two taxes but it is labeled as self employment tax.



Customer: replied 6 years ago.
I guess from your statement, even though I own shares in the company, sub S corp ordinary income is taxed at the same level and is not treated as capital gain income which would provide a lower tax liability I think about 20% on cap gain.
Expert:  CGCPA replied 6 years ago.
That is correct. The residual profit (the profit after all expenses including your salary) is taxed as ordinary income. It is NOT subject to the self employment tax which is where you save on taxes.
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