Sources of Taxable Income
Your taxable income is the amount of money that is multiplied by your marginal tax rate to determine how much you owe the Internal Revenue Service. While not every dollar that you earn may be taxed, there are several types of taxable income that you may have to pay taxes on.
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Salary and Wages
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Salary and wages is the most basic form of taxable income. This is the kind of income that the majority of people have to deal with when filing their taxes and is what you earn from a job. This includes hourly wages, salary, commission, tips and bonuses. When you have this type of income, you will receive a W-2 form from your employer that outlines exactly how much you made for the year.
Self-Employment Income
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Another type of taxable income that you may be subject to is self-employment income. Self-employment income is any money that you make outside a regular job from services rendered. For example, if you run a home-based business, money from this endeavor would be counted as self-employment income. If you are a consultant or freelancer, your money is considered self-employment income. The money that you make through self-employment income is subject to the self-employment tax, which consists of Social Security and Medicare taxes.
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Dividends
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If you are an investor, you might earn dividends from your investment. For example, if you own stocks or shares of a mutual fund, you might regularly receive dividend payments from these entities. Dividends are payments that are made by companies to share the profit they generate among the owners of the business. If the dividend you receive is a qualified dividend, you can pay a lower tax rate on it. If you have a non-qualified dividend, you will pay taxes on it at your regular marginal tax rate.
Interest
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Another type of income that you may receive is interest income. This is the income you receive from investing in bonds or putting money into a savings account. You could also have interest income if you lend money to others. With this type of income, you have to pay taxes on it at your regular marginal tax rate. The advantage of receiving this kind of income is that you do not have to pay Social Security and Medicare taxes on the money.
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