What Is Income?
Definition: Income is the return earned from capital invested. In business, entrepreneurs commit their money in certain activities hoping to earn a profit. For the capital to be seen as properly utilized there has to be some kind of return in terms of revenue or income.
Specifically, income comes from many sources. In the case of a business, income comes from the sale of products or services. For example, a soap producing company earns income by selling soap. On the other hand, a tourist agency gets its income from selling certain services like guiding tourists. For individuals, income is the monetary compensation that they receive after rendering their services.
Income Explanation
Income can refer to many things, depending on the context. For example, the wages that one gets after rendering services is income. However, this person could be holding a number of shares as well as bonds.
If these securities earn the person money, then that is also income. In the United States, the Internal Revenue Service (IRS) describes wages as earned income. This helps when computing an individual’s taxable income. Usually, the IRS deducts taxes from earned income before it reaches your account.
Types of Income
On the other hand, the IRS classifies the income from other sources like the annual dividends from shares as unearned income. This is because the income did not come from direct effort like that applied to jobs. When computing your taxable income, however, the IRS bundles together all forms of income in your name. Notably, both earned and unearned income adds together to give the amount of income from which the IRS can deduct taxes.
Nonetheless, a further classification of income helps the IRS to streamline taxation. On the one hand, there is ordinary income. This includes all income other than dividends. Specifically, ordinary income includes revenue from business activities, salaries and wages, earnings from bond holdings, and so on. On the other hand, there is income from dividends earned from shareholding.
Indeed, the difference between these two types of revenues is significant when it comes to declaration of taxes. Notably, ordinary tax laws apply only to ordinary income. Therefore, if there were to be a change in the income tax, it would affect ordinary income alone. On the other hand, capital gains tax applies to income from dividends alone.
Income Example
Many compound terms include the word income in use in economics. For example, the term “per capita income” helps economists to explain the economic growth of a country. Specifically, per capita income refers to the income that every single individual in an economy earned when shared equally. For example, the gross personal income earned in the US in 2018 was $17.6 trillion. In the same year, there were 327.2 million Americans. Therefore, the per capita income for the year 2018 was $53,789.73. Simply, this is the income per each head in the US for the year 2018.
The word income also appears in compound terms like disposable income. Important to note, the concept of disposable income is critical in economics. Simply, it refers to the income that individuals are left with after taking care of expenses like tax and other debts. Another important concept is discretionary income. As the word suggests, discretionary income is the one that an individual spends on non-essential things. Notably, essential things for individuals include food, clothing, housing, and transportation among others. However, the non-essential things that discretionary income covers include a new car, an upgrade of your house or even eating out.
Oftentimes, households divert their discretionary income to cover unexpected expenses. For example, if your mother suddenly falls ill and there is not enough money for her treatment, discretionary income can cover the unexpected shortfall. Other cases where the term income appears include deferred income, accrued income, fixed income, and residual income among many others. Ultimately, any phrase that includes the term revenue refers to value that an individual or a business earns from an investment.