earning 101
There are two ways that income or earnings ae acquired. You have Active and Passive Income streams which are both valuable but acquired differently. Active income is where you actively work for someone or for yourself to generate a stream of income. Passive income is generating an income without physically doing the work, that is you do the work up front and reap the benefits of your efforts. Examples or passive income are; e-commerce store that you set up and people purchase items, a network marketing business, or franchise, etc.
According to many different studies, here are 7 major types of income:
1. Earned Income
This is usually referred to as your salary or income from your job or place of employment. It may be based on an hourly rate, salary, bonuses, commissions, etc. This is true whether you are employed by someone, or a company, or self employed. Earned income is typically subject to taxes and you should contact a CPA to help you file your income tax return.
According to many different studies, here are 7 major types of income:
1. Earned Income
This is usually referred to as your salary or income from your job or place of employment. It may be based on an hourly rate, salary, bonuses, commissions, etc. This is true whether you are employed by someone, or a company, or self employed. Earned income is typically subject to taxes and you should contact a CPA to help you file your income tax return.
These are tax rates for 2022
2. Business Income
This is usually income from a business that you have set up and you receive extra income. You may have one or more businesses that provide extra income. This type of income is calculated by getting the difference between profit and loss and is also subject to taxes. There are many types of businesses and several types of business structures. The sole proprietor, partnership, and corporations are the basic types of businesses and can be expanded into other types of business organizations such as limited liability company, S Corporations, Trusts, C Corporations, estates, Etc. The different types of structures are taxed differently. A sole proprietorship is a business structure owned by an individual who generally has full control and authority over the business and owns all assets and profits of the business. A business partnership is a business that two or more people own together. Each partner contributes to the financial and operation of the company and in the loses and profits. Examples are LLC Partnership (also known as a multimember LLC), Limited Liability Partnership LLP, Limited Partnership LP, and General Partnership GP. A corporation is a legal entity that is separate and distinct from its owners. Corporation may posses many of the same rights and responsibilities as individuals such as enter contracts, loan and borrow money, sue and be sued, own assets, hire and fire employees, suffer loses and pay taxes. If you structure your business as a Qualified Business QBI there is a special deduction of up to 20% of the qualified business income on your taxes as long as the income is under $163,300 for a single filer or $326,600 for joint filers to qualify. In order to qualify for a QI, you must be a pass through entity. That means that the business income passes through to the owner and is taxed at the rate of the owner. Pass through businesses include sole proprietors, partnerships, S corporations, trusts, and estates. C corporation income is taxed at the corporate tax rate. You may need to meet with a professional for assistance in finding which business structure is best for you.
3. Interest Income
This type of income is received from interest on your bank account or other savings account such as an IRA. The interest rates at this point are very low and you would need to investigate to find sources that pay higher interest rates. If you have funded any loans, you are also likely to be eligible for interest as the principal amount is repaid. These are some ways to earn interest on your savings. Open a high-interest online savings account, switch to a checking account with a high yield, build a cd ladder, or join a credit union. Also you may consider a money market account, certificate of deposit, buy bonds, buy T bills, open a rewards checking account and take advantage of bank bonuses offered. Over time if you place your savings in an interest bearing account especially if it is calculated by compounding it will be more advantageous than keeping your savings in an account that does not pay interest.
4. Dividend Income
Dividend Income is usually received from stocks and shares you invest in, or you paid via dividend if it fits with your company structure. Dividends are commonly known as a share of the profits. A director of a company may be eligible to split profits into twelve monthly dividend payments However, some dividends are paid quarterly or annually. Certain companies on the stock exchange pay dividends to their investors and may be very profitable depending on the amount of shares you hold and the assets of the companies. Some common companies that you may be familiar with that pay dividends include Apple (AAPL), Microsoft (MSFT), Exon Mobil (XOM, Verizon (VZ) and there are others that you may want to add to your portfolio. You should be aware that the stock marked is volatile and you may loose your principle because is is not FDIC insured.
5. Rental Income
If you own property, you may add to your income stream by collecting rental income. It is important to structure your rental to maximize your return. If you structured your property under a separate company you may be subject to extra taxes. As a landlord, you may have a mortgage or loan to pay while you acquire new properties, you may have other fees such as insurance, maintenance, HOA fees, taxes, etc. to deduct from you overall profit. Therefore, factor in what comes in as well as what goes out. If you want to start earning rental income as a business, there are a few suggestions from successful rental property owners. Join a local real estate investment club REI and start networking. You may be able to gain information and establish partnerships to assist you with the process. You should pick a niche and choose your rental property market. For example you may want to start with single family properties or you may want to work with multi family properties. You may decide to flip properties where you purchase them, fix them up and sell them. You may decide to birddog or refer properties to individuals who want to invest in them. You may decide to become part of an investment club where you contribute income and share in the profit or loss of the investment. Next you should figure out the financing, whether you invest your own money or you may use a loan from a bank or other institution, or you may use money from real estate investors. Conduct appropriate research, and add necessary functions to your schedule, or hire a professional or manager who will find properties, research the value and determine what needs to be done to prepare the property for sale or rental, manage the rental property such as market the property, screen the tenants, collect the rent, take care of the repairs, monitor the condition of the property, etc. Rental properties can be profitable and provide income to your portfolio or a loss depending on how you manage them. Consult a Real Estate Professional to get personal information about the the most advantageous way to structure your rental assets.
6. Capital Gains
Capital Gains income is acquired through the sale of assets such as stocks, a business, art, loans, etc. This type of income is subject to something called capital gains tax. Capital gains are usually acquired as a lump sum amount instead of over a consistent period of time. Almost everything you own and use either for personal or investment purposes is a considered a capital asset. Your home, furnishings, stocks, bonds, etc. are considered held investments. If you sell an asset and make a profit, it is considered capital gain, and if you sell an asset for less than you acquired the asset, it is considered a capital loss. Losses from the sale of personal use property, such as your home or automobile are not tax deductible. The tax rate is around 15% if your income is $80,000 to $441,450 for a single individual., $496,600 for married filing jointly $469,050 for head of household and $248,300 for married filing separately, on capital gain for most individuals. If your income is less than $80,000 you may not be taxed on some of your capital gain income. Short term capital gains are subject to ordinary income taxation. Consult your CPA for personal information about your capital gain taxation.
7. Royalties or Licensing Income
Artistic or creative individuals who produce music or art or inventions may license it for public use and therefore create extra income called royalties. Actors, musicians, designers who share their creations for mass production are likely to bring in a steady stream of income. If you watch a rerun of a television show or hear a song repeatedly, the artist is probably receiving royalties, if the business was set up correctly. When you see a McDonalds, or Pizza Hut, etc., royalties are being paid to use the name that provides credibility of the product. If you have an idea or a talent, make sure you get a patent or license so that when others use it, you will receive royalties.
This is usually income from a business that you have set up and you receive extra income. You may have one or more businesses that provide extra income. This type of income is calculated by getting the difference between profit and loss and is also subject to taxes. There are many types of businesses and several types of business structures. The sole proprietor, partnership, and corporations are the basic types of businesses and can be expanded into other types of business organizations such as limited liability company, S Corporations, Trusts, C Corporations, estates, Etc. The different types of structures are taxed differently. A sole proprietorship is a business structure owned by an individual who generally has full control and authority over the business and owns all assets and profits of the business. A business partnership is a business that two or more people own together. Each partner contributes to the financial and operation of the company and in the loses and profits. Examples are LLC Partnership (also known as a multimember LLC), Limited Liability Partnership LLP, Limited Partnership LP, and General Partnership GP. A corporation is a legal entity that is separate and distinct from its owners. Corporation may posses many of the same rights and responsibilities as individuals such as enter contracts, loan and borrow money, sue and be sued, own assets, hire and fire employees, suffer loses and pay taxes. If you structure your business as a Qualified Business QBI there is a special deduction of up to 20% of the qualified business income on your taxes as long as the income is under $163,300 for a single filer or $326,600 for joint filers to qualify. In order to qualify for a QI, you must be a pass through entity. That means that the business income passes through to the owner and is taxed at the rate of the owner. Pass through businesses include sole proprietors, partnerships, S corporations, trusts, and estates. C corporation income is taxed at the corporate tax rate. You may need to meet with a professional for assistance in finding which business structure is best for you.
3. Interest Income
This type of income is received from interest on your bank account or other savings account such as an IRA. The interest rates at this point are very low and you would need to investigate to find sources that pay higher interest rates. If you have funded any loans, you are also likely to be eligible for interest as the principal amount is repaid. These are some ways to earn interest on your savings. Open a high-interest online savings account, switch to a checking account with a high yield, build a cd ladder, or join a credit union. Also you may consider a money market account, certificate of deposit, buy bonds, buy T bills, open a rewards checking account and take advantage of bank bonuses offered. Over time if you place your savings in an interest bearing account especially if it is calculated by compounding it will be more advantageous than keeping your savings in an account that does not pay interest.
4. Dividend Income
Dividend Income is usually received from stocks and shares you invest in, or you paid via dividend if it fits with your company structure. Dividends are commonly known as a share of the profits. A director of a company may be eligible to split profits into twelve monthly dividend payments However, some dividends are paid quarterly or annually. Certain companies on the stock exchange pay dividends to their investors and may be very profitable depending on the amount of shares you hold and the assets of the companies. Some common companies that you may be familiar with that pay dividends include Apple (AAPL), Microsoft (MSFT), Exon Mobil (XOM, Verizon (VZ) and there are others that you may want to add to your portfolio. You should be aware that the stock marked is volatile and you may loose your principle because is is not FDIC insured.
5. Rental Income
If you own property, you may add to your income stream by collecting rental income. It is important to structure your rental to maximize your return. If you structured your property under a separate company you may be subject to extra taxes. As a landlord, you may have a mortgage or loan to pay while you acquire new properties, you may have other fees such as insurance, maintenance, HOA fees, taxes, etc. to deduct from you overall profit. Therefore, factor in what comes in as well as what goes out. If you want to start earning rental income as a business, there are a few suggestions from successful rental property owners. Join a local real estate investment club REI and start networking. You may be able to gain information and establish partnerships to assist you with the process. You should pick a niche and choose your rental property market. For example you may want to start with single family properties or you may want to work with multi family properties. You may decide to flip properties where you purchase them, fix them up and sell them. You may decide to birddog or refer properties to individuals who want to invest in them. You may decide to become part of an investment club where you contribute income and share in the profit or loss of the investment. Next you should figure out the financing, whether you invest your own money or you may use a loan from a bank or other institution, or you may use money from real estate investors. Conduct appropriate research, and add necessary functions to your schedule, or hire a professional or manager who will find properties, research the value and determine what needs to be done to prepare the property for sale or rental, manage the rental property such as market the property, screen the tenants, collect the rent, take care of the repairs, monitor the condition of the property, etc. Rental properties can be profitable and provide income to your portfolio or a loss depending on how you manage them. Consult a Real Estate Professional to get personal information about the the most advantageous way to structure your rental assets.
6. Capital Gains
Capital Gains income is acquired through the sale of assets such as stocks, a business, art, loans, etc. This type of income is subject to something called capital gains tax. Capital gains are usually acquired as a lump sum amount instead of over a consistent period of time. Almost everything you own and use either for personal or investment purposes is a considered a capital asset. Your home, furnishings, stocks, bonds, etc. are considered held investments. If you sell an asset and make a profit, it is considered capital gain, and if you sell an asset for less than you acquired the asset, it is considered a capital loss. Losses from the sale of personal use property, such as your home or automobile are not tax deductible. The tax rate is around 15% if your income is $80,000 to $441,450 for a single individual., $496,600 for married filing jointly $469,050 for head of household and $248,300 for married filing separately, on capital gain for most individuals. If your income is less than $80,000 you may not be taxed on some of your capital gain income. Short term capital gains are subject to ordinary income taxation. Consult your CPA for personal information about your capital gain taxation.
7. Royalties or Licensing Income
Artistic or creative individuals who produce music or art or inventions may license it for public use and therefore create extra income called royalties. Actors, musicians, designers who share their creations for mass production are likely to bring in a steady stream of income. If you watch a rerun of a television show or hear a song repeatedly, the artist is probably receiving royalties, if the business was set up correctly. When you see a McDonalds, or Pizza Hut, etc., royalties are being paid to use the name that provides credibility of the product. If you have an idea or a talent, make sure you get a patent or license so that when others use it, you will receive royalties.