3 Types of Income Explained | Capital One (2024)

September 15, 2022 |5 min read

    Money doesn’t grow on trees. So where does it come from? You might be surprised to learn how many different types of income sources there are, especially in today’s gig economy.

    Some sources of income—like your paycheck—may be obvious to you. But you may not have thought about other income streams. Understanding the big picture could help you manage your finances.

    Key takeaways

    • Three of the main types of income are earned, passive and portfolio.
    • Earned income includes wages, salary, tips and commissions.
    • Passive or unearned income could come from rental properties, royalties and limited partnerships.
    • Portfolio or investment income includes interest, dividends and capital gains on investments.
    • Knowing about different income streams could help you plan for your future.

    Refer a friend and earn money

    Earn up to $500 a year when your friends are approved for Capital One cards.

    Read more

    What is income?

    Income is anything you gain that you can put in the plus or revenue column of your budget. It’s commonly measured in cash. Your paycheck may be the first source of income that comes to mind. But other types of income could include:

    • Making tips and commissions on top of your regular wages or salary
    • Selling goods or providing services at a profit
    • Earning interest, dividends or capital gains on investments
    • Winning prizes, awards and scholarship money
    • Receiving gifts, allowances or inheritances
    • Obtaining government benefits and tax refunds
    • Withdrawing from retirement or pension funds

    What are the different types of income?

    There are different types of income, but three of the most common are earned income, passive income and portfolio income. The main difference is in how you make each type of money.

    1. Earned income

    Did you get paid to babysit, mow lawns or deliver newspapers as a kid? Even then, you were earning income.

    Earned income is exactly what it sounds like: It’s money you earn by working—either for yourself, someone else or a business you own. It’s also called “active income” because you actively perform a service for it.

    If you work for a company—from a small business to a large corporation—your employer may pay you an hourly wage based on the amount of time you work. Or your employer might pay you a salary, which is a fixed amount to do a certain job. Salaries can be paid weekly, biweekly or monthly, but it’s common for them to be expressed as annual figures.

    Earned income could also include bonuses and extra pay. For example, taxi drivers and restaurant servers can earn tips. And people who work in sales can earn commissions.

    Gigs can be another option for earning income. People who want to be independent, self-employed or work a part-time job may want to consider gig work. These side hustles are often temporary or short-term jobs performing a single task on demand. Musicians are a prime example. So are babysitters, freelance writers and food delivery drivers.

    2. Passive income

    Want to make money while you sleep? It’s possible to make money without actively working for it. That’s why it’s considered unearned or passive income. Rental income and income from royalties and limited partnerships are some examples of passive income.

    Do you own anything other people may want to use? It’s common for people to rent or lease a second home or even a spare bedroom in their own house, which is considered rental income. Leasing a commercial building could also be a source of monthly income. Businesses can lease vehicles and equipment for a profit too.

    Have you written a song or a book? Invented something? If you’ve designed, built or made something unique, you could get paid royalties for it. Royalties can be paid by someone who uses your work or other property for their own purposes. They may pay per item or by period of time.

    If you loan a friend money to open a craft brewery in exchange for a share of their profits, for example, that could be considered a limited partnership. As long as you don’t actively work in the brewery, those earnings could be considered passive income.

    Other examples of passive income include alimony, child support, unemployment, Social Security and worker’s compensation.

    3. Portfolio income

    A financial portfolio is a collection of your monetary assets. And portfolio or investment income can include interest, dividends and capital gains on investments.

    Your bank or credit union may pay you interest to deposit your money into one of their accounts. For example, you can earn interest on checking accounts, savings accounts, money market accounts and certificates of deposit—commonly called CDs. The amount of money you make in interest can vary.

    You could also earn money by investing in stocks, bonds and mutual funds. When you buy bonds, you’re essentially loaning money to a corporation or a government in exchange for them paying you interest on your money. When you buy stock in a company, you’re a part owner in that company, so you can share in its profits. Similarly, you can make money from mutual funds, which pool money from investors to make and manage investments.

    Think of dividends as the payday on your investments. When a company makes money, it can pay a portion of its profits to shareholders. Corporations commonly pay dividends in cash. But you can also receive more stocks or other assets, such as property.

    When you sell something for more than you paid for it, the difference is called your capital gain. With financial investments, you can earn capital gains when you sell a stock or cash out a pension fund whose value has increased since you bought it.

    Different types of income in a nutshell

    There are many different types of income you can earn. You can actively work for earned income, or you can let your money work for you in passive income streams. You might also earn income from interest, dividends and capital gains on investments.

    The more you know about the different types of income sources, the better you can manage your finances—and maybe even earn more money.

    3 Types of Income Explained | Capital One (2024)

    FAQs

    3 Types of Income Explained | Capital One? ›

    Three of the main types of income are earned, passive and portfolio. Earned income includes wages, salary, tips and commissions. Passive or unearned income could come from rental properties, royalties and limited partnerships. Portfolio or investment income includes interest, dividends and capital gains on investments.

    What are the three types of income explained? ›

    Key Points. Earned income is the money you make in salary, wages, commissions, or tips. Investment income is money you make by selling something for more than you paid for it. Passive income is money you make from something you own, without selling it.

    What is Type 3 income? ›

    Passive income. Passive income is money earned from a rental property, limited partnership or other business in which you're not actively involved. For example, if you invest in a business without participating in its development, you're a silent investor receiving passive income.

    What do you put for source of income? ›

    Wages, salaries, and tips

    This is money you earn at your job. For some people, this may be roughly the same amount on a regular basis. Others may have income varying from paycheck to paycheck.

    What are the three 3 kinds of individuals according to the type of income that they earned? ›

    The three common categories are: active, passive, and portfolio. These three categories differ based on how you earn money and how the money will be taxed. Find out which one is right for you as we discuss the difference between active, passive, and portfolio income.

    What are the 3 main parts of an income statement discuss each? ›

    The income statement presents revenue, expenses, and net income. The components of the income statement include: revenue; cost of sales; sales, general, and administrative expenses; other operating expenses; non-operating income and expenses; gains and losses; non-recurring items; net income; and EPS.

    What is an example of a capital income? ›

    Capital income is income received from non-regular (one-off) transactions. The main example is the income generated from the sale of non-current assets. Other examples are loans received by the business and capital invested in the business by the owner or owners of the business.

    What are the income categories? ›

    Types of Income

    Three main categories of income that are part of taxation are: ordinary income, capital gain, and tax-exempt income.

    What is earned income and capital income? ›

    Taxable income is divided into capital income and earned income. Capital income consists of income generated by your property and assets: dividends, capital gains, rental income, etc. All other income, such as your wages and pension, is earned income.

    What do you mean by type of income? ›

    What are Types of Income? There are two kinds of income: Earned income and unearned income. Earned income is money you make while actively working, like being employed or running your own business. Unearned income typically includes investment, retirement, and passive income.

    What is your total income? ›

    Your total income is your gross income from all sources less certain deductions such as expenses, allowances and reliefs. If you are married or in a civil partnership and jointly assessed, your spouse's or civil partner's income is included in total income.

    What does source name mean on income? ›

    • “Source of income” means lawful, verifiable income. paid directly to a tenant or to a representative of a. tenant, or paid to a housing owner or landlord on. behalf of a tenant, including federal, state, or local.

    What are the most common types of income? ›

    3 Main Types of Income

    Income can be categorized into three main types: ordinary income, capital gains and tax-exempt income. Each type comes with its own characteristics and tax implications.

    What are the three types of taxes and how can each affect citizens incomes? ›

    progressive tax—A tax that takes a larger percentage of income from high-income groups than from low-income groups. proportional tax—A tax that takes the same percentage of income from all income groups. regressive tax—A tax that takes a larger percentage of income from low-income groups than from high-income groups.

    Is capital gain passive income? ›

    Passive income can come from a variety of sources, such as interest, dividends, rental income, and capital gains. Capital gains and dividends can sometimes be more tax advantageous than the tax rules for earned income.

    What is the classification of income? ›

    Income can be classified as current or non-current depending on whether it is being generated right now or in the future. Current income is commonly referred to as cash flow, while non-current income may be generated by assets such as property, investments, or goodwill.

    Top Articles
    Latest Posts
    Recommended Articles
    Article information

    Author: Patricia Veum II

    Last Updated:

    Views: 6233

    Rating: 4.3 / 5 (64 voted)

    Reviews: 87% of readers found this page helpful

    Author information

    Name: Patricia Veum II

    Birthday: 1994-12-16

    Address: 2064 Little Summit, Goldieton, MS 97651-0862

    Phone: +6873952696715

    Job: Principal Officer

    Hobby: Rafting, Cabaret, Candle making, Jigsaw puzzles, Inline skating, Magic, Graffiti

    Introduction: My name is Patricia Veum II, I am a vast, combative, smiling, famous, inexpensive, zealous, sparkling person who loves writing and wants to share my knowledge and understanding with you.