Unearned income is generally defined as any type of revenue gain or income that is not the result of the receipt of a wage, salary, or tips for services rendered. Within this broad definition, this type of income is also understood to be any type of unearned revenue that is collected in advance before contracted services are rendered. This would include deposits on construction or remodeling jobs that will be performed by professionals. At the point that the project is completed and the balance of the charge is paid in full, the deposit or advance would be classified as earned income.
For many people, unearned income takes the form of funds received as interest or dividends on an investment. The interest earned on a bank savings account or interest bearing checking account can be properly classified as this type of income, since the account holder did not earn the funds by rendering a service to the bank. In like manner, profits that are earned from stocks, bonds, commodities, or currency exchange deals would be considered unearned income.
Property rental is also regarded as a source of unearned income. While the property is owned by the recipient of the income earned from rentals, the revenue that is generated is considered to have come about as a result of actions other than the recipient earning the funds by a direct personal effort. The term indirect income is sometimes used to describe the type of income that is generated by renting property.
It is important to note that this income is still considered to be taxable income in most countries around the world. This means that at some point in time, the recipient of the unearned income will have to account for the revenue and pay taxes on the funds received. Depending on the country of jurisdiction, the rate of tax applied may be more or less than taxes that are paid on wages, salaries, and tips. In other instances, the total amount may be bundled in with the earned income for the same period and taxed at the same rate.
