The Internal Revenue Code requires you to pay taxes on most types of income. Even some non-monetary compensation meets the definition of income for tax purposes. Certain types of income are exempt from income tax or qualify to have the tax deferred to a later date. The tax code is complex and contains numerous exceptions to every rule; consult with a tax professional for advice on your specific situation.
Amounts you receive in exchange for personal services qualifies as employment income. In addition to wages, salary, commissions and bonuses, taxable employment income also includes stock options and certain fringe benefits. Other benefits, such as health insurance or child care paid by your employer, generally are not part of your taxable employment income.
Business income includes compensation earned from rental of personal property, royalties, and income from partnerships or S corporations. Income from the rental of personal property may be considered nonbusiness income if you do not operate the rental service as a business, and if your purpose for renting the property is not to make a profit. Partnerships and S corporations generally do not pay sales tax as entities; instead, the tax is passed on to the partners or shareholders, who are taxed individually.
Interest, dividends and capital gains paid on money you have invested qualifies as taxable income. You also include in your taxable income proceeds from the sale of investments; if you lose money on a sale, you can deduct the loss. Earnings and proceeds on money in a tax-deferred retirement account, such as a 401k or Individual Retirement Account, are not taxable, and neither are losses deductible. You pay tax on these accounts when you withdraw funds.
Social Security Benefits
Separate rules apply to the tax treatment of Social Security benefits. The portion considered taxable varies depending on your total income and your filing status. At most, however, you are taxed on only 85 percent of your Social Security benefits.
Many other types of income fall into the taxable category. You must include in your gross income any unemployment benefits, canceled debt that does not qualify for an exclusion, alimony or hobby income. Survivor benefits, interest on life insurance proceeds -- but not the proceeds themselves -- property or services received in a barter transaction, and gambling winnings including cash and non-cash prizes also qualify as taxable income.
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