The Three Primary Types of Taxable Income As Defined by the IRS

With limited exceptions, most of the income you receive during the year is taxable by the IRS. That doesn't mean, however, that you’ll always owe money at the end of the year. The IRS provides many deductions and credits to offset your taxable income, and this could result in a refund. Still, when you have taxable income, you’re required to report it unless you meet IRS criteria for those who don’t have a filing requirement.

Employee Compensation and Benefits

Wages are considered one of the most common types of taxable income. Employee compensation and certain fringe benefits are included in this category and are subject to income tax rates. If you claim that you are exempt from withholding on your Form W-4, you won’t have income taxes withheld from your pay, but you will still have to pay taxes on that income. Withholding credits are used to offset taxes due, so keep this in mind when deciding how many withholding allowances you claim.

Business and Investment Income

If you’re self-employed, the net profits from your business are subject to income tax. Many folks confuse gross profits with net profits and believe their gross sales will be taxed. However, you’re allowed to claim eligible business expenses to offset your gross sales, and the result is the actual amount you’ll be taxed on. Other types of taxable business income include net rental income, partnership and S-corporation income, and royalties. Also included in this category is investment income. You will be taxed for stock dividends, stock sales, capital gains and interest on savings.

Miscellaneous Taxable Income

Some types of taxable income don’t fit in the common categories, so the IRS groups them in a miscellaneous category. Examples of income in this group include canceled debts, some life insurance and death benefits, and unemployment compensation. Other types of miscellaneous income include prizes and awards, the value of items you receive in trade or barter, hobby income and alimony income.

Constructive Receipt

The IRS has a term for determining when your income is taxed. It’s called constructive receipt. You have constructive receipt of your taxable income when you acquire the rights to the money, which could be different from when you actually receive it or deposit it your bank. For example, if your employer cuts you a bonus check at the end of the year, the income is taxable for that year -- even if the check is not available for pickup or deposit until the beginning of the New Year. Be mindful of this term and report income to the IRS as it’s reported to you on Form W-2 and other income documents.

About the Author

With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.