What Is Earned Income? Definition and Meaning

Earned income is one of the most common types of income. Most of us are pretty familiar with it. This is how we generate most of our income. Through a salary and working, we are able to earn a salary. If you have a business the income generated by the business is also an earned income type. As long as you are working on your business the income is categorized as active income.

Whether you work for hourly pay or freelancing these are both examples of earned income.

Advantages

This type of income has several advantages. It is perhaps one of the easiest types of income to generate since you just need to go out there and get yourself a job. Another great advantage is that you can easily move from one job to another easily.

This versatility is also a great advantage. It also does not require any capital in order for you to generate earned income. Another advantage is the fact that you know beforehand how much you will earn from a particular job or task. As you will see some income types do not have this advantage.

Easy to start generating
You can easily change job
You know beforehand how much you will make
It does not require any initial capital

Disadvantages

Despite the fact that it is an easy income type to generate there are several disadvantages and risks associated with earned income. Many people limit themselves to just this type of income, and this is how you get yourself trapped in the rat race.

On one hand, earned income is impossible to scale. When you have a company you might be able to hire more staff, but you cannot clone yourself to earn twice as much. In most jobs, we are also limited to receiving a certain fixed amount. This makes it seem that no matter how much effort we put into earned income, we will not be able to generate more income.

It is also particularly difficult depending on the job to get a raise. This makes it difficult to increase your earned income.

There is always the risk of losing your job or having a pay cut. Therefore earned income is much more vulnerable than other types because it does not directly depend on yourself.

If we consider taxes there are also some disadvantages. When you are a business owner you might have some tax advantages, and you will be able to optimize taxes in a different way. As a worker, you will have a higher tax rate than if you optimize taxes through your company.

Earned income also has another disadvantage which is related to age. When we are young, we are able to work long hours and generate more income. As we get older, even if we are in a better position, our productivity and efficiency will decrease. Therefore our productivity and ability to generate earned income decreases with time.