What Is Income?

The receipt of income is not limited to the receipt of money, you can also receive income in the form of property or services.  From an employee’s perspective income is viewed as wages and fringe benefits received from an employer. We will be exploring other forms of income to include that from bartering, partnerships, S corporations, and royalties. It is important to note that some income might be taxable while others aren’t.

Income is generally taxable unless it is specifically exempt by the operation of law. Taxable and non-taxable income must both be report on your tax return. However, tax is only levied on the income that’s taxable.

Constructively-received income. 

Income is viewed as being received and taxable if it is available to you irrespective of the fact that it is not actually in your hands at the close of the period.

For example, an employee check mailed before year end for services performed in December, is not received until the first week in January. This wage is considered income received for December and is tax in that same month.

Assignment of income.

Income received by any agent on your behalf is deemed to be income received by you and should be included in your total income in the year received. This is due to the fact that the agent acted on your behalf so in essence you have constructively received that income when they did.

If for example with you are a philanthropic person and with your employer you designate that a percentage of your salary should be directly paid to a particular organization. That amount must be considered and included in your income when the organization receives it.

Unearned or Prepaid income.

From a cash basis point of view, prepaid income, such as compensation for future services, is generally included in your income in the year the income is received. Such income can be deferred if the accruals method of accounting is used and thus the income is recognized in the period service is rendered.

Employee Compensation

As a generally rule, one should include in gross income all income received irrespective of the form of receipt. This includes all wages, salaries, commissions, fees, tips and even fringe benefits and stock options.

Employed persons should receive a Form W-2, Wage and Tax Statement, from their employer at the end of the year. This shows the pay received for services performed. Self-employed persons would need to prepare their financial statement to arrive at income for the period.

Childcare providers.

As stated earlier, all payment received should be include in total income. Therefore, if you provide child care, either in the child’s home or in your home or other place of business, the pay you receive must be included in your income.

It is worth noting that if you babysit for friends, relatives or even the neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you.

If you are not an employee, you are probably a self-employed independent contractor and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. You generally are not an employee unless you are subject to the will and control of the person who employs you as to what you are to do and how you are to do it.

Rental Income.

Generally, if your primary reason for undertaking an activity is for income or profit, any amounts received is viewed as income. This is also the case if you are involved in the rental activity with continuity and regularity, your rental activity is a business.

If you rent out personal property, such as equipment or vehicles, how you report your income and expenses is generally determined by:

  • Whether or not the rental activity is a business, and
  • Whether or not the rental activity is conducted for profit.

Partnership Income

A partnership does not pay taxes, rather the income, gains, losses, deductions, and credits of a partnership are passed through to the partners based on each partner’s distributive share of these items.

A partner is required to report his or her distributive share of these items on his or her tax return whether or not they have actually been distributed. However, the distributive share of the partnership losses is limited to the adjusted basis of your partnership interest at the end of the partnership year in which the losses took place.

S Corporation Income

Like a partnership, in general an S corporation does not pay tax on its income. Instead, the income, losses, deductions, and credits of the corporation are passed through to the shareholders based on each shareholder’s pro rata share. You must report your share of these items on your return. Generally, the items passed through to you will increase or decrease the basis of your S corporation stock as appropriate.

Royalty Income

Royalties from copyrights, patents, and oil, gas and mineral properties are taxable as ordinary income.

Part I of Schedule E (Form 1040), Supplemental Income and Loss is utilized to report this form of income.  However, if you hold an operating oil, gas, or mineral interest or are in business as a self-employed writer, inventor, artist, etc., report your income and expenses on Schedule C or Schedule C-EZ.

User | 11/12/2017