How does the IRS define "earned income"?

• A. Income made from investments and dividends
• B. Income received for work performed, including wages and net earnings from self-employment
• C. Passive income from rental properties
• D. Retirement account contributions

Answer: (B)

The IRS defines "earned income" specifically as income that is received for work performed. This includes wages, salaries, tips, and net earnings from self-employment activities. Earned income reflects the compensation individuals receive as a direct result of their labor or services, establishing a clear link between effort and financial reward.

Other sources of income, such as investments or dividends, are not classified as earned income because they do not require active involvement in work or services. Similarly, passive income from rental properties is generated without the owner’s direct participation in ongoing activities related to the property, and thus falls outside the earned income definition. Contributions to retirement accounts, while potentially impacting tax situations, do not qualify as earned income because they do not represent compensation received for work done. Thus, the definition emphasizes the direct connection between work performed and the income received.