Self-employment tax is 15.3%: 12.4% Social Security plus 2.9% Medicare Applies to net self-employment income above $400 per year Half of SE tax is deductible as an above-the-line adjustment on Form 1040 S-corp election can reduce SE tax by splitting income into salary and distributions

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Tax Planning

Earned Income vs Unearned Income

Earned and unearned income are taxed differently and determine eligibility for Social Security credits, retirement contributions, and credits like the EITC.

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Earned vs Unearned Income Overview

Earned income results from personal labor or active business participation
Unearned income comes from investments, pensions, and other non-work sources
The distinction affects payroll taxes, retirement eligibility, and tax credits
Both types are reported differently on your federal tax return

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Earned vs Unearned Income Overview

Earned income results from personal labor or active business participation
Unearned income comes from investments, pensions, and other non-work sources
The distinction affects payroll taxes, retirement eligibility, and tax credits
Both types are reported differently on your federal tax return

What Counts as Each Type

Earned: wages, salaries, tips, commissions, and net self-employment income
Earned: taxable scholarship amounts used for living expenses and combat pay
Unearned: dividends, interest, capital gains, rental income, and royalties
Unearned: pension withdrawals, Social Security benefits, and annuity distributions

Social Security and Retirement Eligibility

Only earned income counts toward Social Security credits and benefit calculations
The 2025 Social Security wage base is $176,100 for the 6.2% OASDI tax
IRA contributions require earned income at least equal to the contribution amount
401(k) deferrals require W-2 wages or self-employment income to participate

Self-Employment Tax

Self-employment tax is 15.3%: 12.4% Social Security plus 2.9% Medicare
Applies to net self-employment income above $400 per year
Half of SE tax is deductible as an above-the-line adjustment on Form 1040
S-corp election can reduce SE tax by splitting income into salary and distributions

Kiddie Tax on Unearned Income

Children under 19 or full-time students under 24 face the kiddie tax rules
First $1,350 of unearned income is tax-free; next $1,350 taxed at child's rate (2025)
Unearned income above $2,700 is taxed at the parent's marginal rate (2025)
Earned income from a child's job is taxed at the child's own lower rate

EITC and Medicare Surtaxes

The EITC requires earned income and can be worth up to $7,830 for large families
The 0.9% additional Medicare tax applies to earned income above $200K or $250K joint
The 3.8% net investment income tax applies to unearned income above those thresholds
Spousal IRA allows a non-working spouse to contribute based on the other's earnings

Key Takeaways

Earned income drives payroll taxes, Social Security credits, and retirement eligibility
Unearned income faces no payroll tax but is subject to the 3.8% NIIT above thresholds
Understand which income type you generate to plan contributions and credits properly
Consult a qualified tax advisor to optimize your mix of earned and unearned income

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The information above is for educational purposes only and does not constitute investment advice, a recommendation, or a solicitation to buy or sell any security. Any historical figures are for illustration only, and past performance does not guarantee future results. Tax laws, regulations, and contribution limits change frequently, the details here may become outdated. Individual circumstances vary. Consult a qualified financial advisor, CPA, or attorney for guidance specific to your situation. Rubric Advisors is registered with the California DFPI; registration does not imply a certain level of skill or training.

Earned Income vs Unearned Income

Earned vs Unearned Income Overview

What Counts as Each Type

Social Security and Retirement Eligibility

Self-Employment Tax

Kiddie Tax on Unearned Income

EITC and Medicare Surtaxes

Key Takeaways

Earned vs Unearned Income Overview

What Counts as Each Type

Social Security and Retirement Eligibility

Self-Employment Tax

Kiddie Tax on Unearned Income

EITC and Medicare Surtaxes

Key Takeaways

Related Topics

Kiddie Tax Rules: What Parents and Grandparents Need to Know

Estimated Tax Payments

Net Investment Income Tax (NIIT) & Medicare Surtax

Earned Income vs Unearned Income

Earned vs Unearned Income Overview

What Counts as Each Type

Social Security and Retirement Eligibility

Self-Employment Tax

Kiddie Tax on Unearned Income

EITC and Medicare Surtaxes

Key Takeaways

Earned vs Unearned Income Overview

What Counts as Each Type

Social Security and Retirement Eligibility

Self-Employment Tax

Kiddie Tax on Unearned Income

EITC and Medicare Surtaxes

Key Takeaways

Related Topics

Kiddie Tax Rules: What Parents and Grandparents Need to Know

Estimated Tax Payments

Net Investment Income Tax (NIIT) & Medicare Surtax