What are the different types of income?
Diversify your income, they say; but how does one actually create different types of income?
This post is about different types of income.
Let’s dive into the top 7 different types of income:
1. Earned: Salary/Ordinary Income (W-2)
The most common type of income is an earned salary or ordinary income. Essentially, this is what a job would pay. It’s earned income from work or employment. This can either be paid as hourly (per hour, with overtime pay for exceeding the typical 40 hours per week) or salary (fixed, set amount, regardless of how many hours). If this is someone’s sole or majority income, this is what people typically mean by diversifying your sources of income. In the case of sudden unemployment, you would have an additional form of income.
2. Contract Work (1099)
Contract work is a specific task or project for a set amount of time. This is usually a fixed fee or hourly rate. Unlike that of earned salary or ordinary income, contract work doesn’t typically come with benefits, like job security. This is commonly used to meet short-term needs. This is commonly known as side hustles, at their beginning. So this could be driving for Uber/Lyft, walking dogs for Wag/Rover, delivering food for DoorDash/Uber Eats, Fiverr, and more!
3. Capital Gains
This type of income is a result of investment income. Usually an investment is purchased and sold (liquidated) after 1 full year (365 days). When it’s liquidated, capital gains is created if the selling price is higher than the initial purchase price. Essentially, the difference between the purchase and selling price, and if the difference is positive, that’s considered capital gains. The types of investments that have the potential to create capital gains include stocks, bonds, and real estate.
For example, selling a house at a higher price than when purchased creates capital gains.
4. Interest
Similar to capital gains income, this income results as earned money from investments. These investments include savings accounts, CDs (certificates of deposits), bonds, and other. The interest consists of a rate earned. That rate is determined by the type of investment as well as the amount of money invested.
Savings accounts usually offer a percentage of interest to the customer as a result of parking their money with said bank. In recent years, a popular one is for interest from high yield savings accounts. These high yield savings accounts are usually with banks that don’t have brick-and-mortar buildings so they have less overhead and can ultimately pass those savings onto the customer.
5. Rental
Rental income comes from renting out a property that you own. Properties can include residential or commercial spaces. Residential spaces include apartments, condos, and houses. Whereas, commercial spaces include offices, retail stores, warehouses, and more.
AirBnb is a common source of rental income, where owners list and rent their properties for short-term vacation rentals.
6. Commission
This income is usually a percentage of sales. A common type of commission income is affiliate income! Yup, that’s right! When products or services are recommended through an affiliate link/code, the person recommending the product/service would get a commission on that sale; hence a percentage of sales. Affiliate percentages can vary and while they may be low individually, they can add up!
7. Self-Employment
As its name suggests, this income is earned by individuals who work for themselves. With content creation and influencers on the rise, we’ve seen an increase in those who chose the self-employment route and decided to work for themselves.
To reiterate, the top 7 different types of income are:
- Earned: Salary/Ordinary Income (W-2)
- Contract Work (1099)
- Capital Gains
- Interest
- Rental
- Commission
- Self-Employment
There you have it! Interested in learning more about where to park the different types of income? Check this post out for how many bank accounts should you have!
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