Takeaways
- Ordinary income is earned income that is taxed at marginal tax rates set by the IRS.
- Ordinary income can either be individual income or business income.
- Ordinary, or W-2 income, is subject to the highest tax rate and brackets.
- Tax filers earn ordinary income from salaries, startup income, or being self-employed.
- Ordinary income includes hourly wages, yearly salaries, bonuses, tips, and commissions.
What Is Ordinary Income?
Ordinary income is any personal income that is taxed at the marginal tax rates. Ordinary income includes salaries, wages, bonuses, royalties, interest income, short-term capital gains, tips, commissions, and rents.[1]
The marginal tax rate is the additional tax you must pay for every dollar earned.[2] For federal income taxes, your marginal tax rate is the highest tax bracket you face. Earning more ordinary income may mean you will have to pay more in income taxes. Let’s look at what counts as ordinary income.
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9 Examples of Ordinary Income
Here are nine examples of earned ordinary income you must include on your taxes, affecting whether you receive a tax liability or tax credit.
- Professional Salaries: The salary you earn throughout the year working for your company is considered ordinary. If you have worked for multiple companies, you must add your total salary income from each Form W-2 when filing your annual tax return. (Read about how to get the raise you deserve).
- Hourly Wages & Tips: For freelancers, consultants, and other professionals who earn hourly wages or tips, this income is considered ordinary by the IRS. Whether you earn this income working for someone else or running your own business, these earnings count toward your marginal tax rate. (Read about 10 popular freelance jobs).
- Bonuses: Getting a bonus is always fun. If you earn a bonus due to outstanding work, receive one as part of your year-end compensation, or get a sign-on bonus when joining a new company, you will need to include this in your W-2. These bonus payments are considered ordinary income. (Read about how to advance your career).
- Interest Income: For those maximizing their emergency and slush fund savings in a high-yield online savings account, the interest income they receive is considered ordinary income, too. The good news is that this interest income can help offset monthly bills throughout the year or accelerate their saving goals with compounding interest.
- Short-term Capital Gains: Whether you are new to investing or are a seasoned stock trader, you might have to pay short-term capital gains when you sell investments. If you buy stock or are issued stock options, you must satisfy a holding period requirement for your gains not to be considered short-term (usually more than 2 years). (See our picks for the best online brokerage accounts).
- Commissions: Many businesses use a commission payment compensation structure to motivate high-performing employees. Gross income earned from personal services, like commissions, is treated as ordinary income. You must include your commissions as ordinary income if you are a real estate broker, sales manager, or insurance broker.
- Royalties: If you receive royalties from patents, copyrights, or properties, the IRS considers this taxable ordinary income. However, your annual tax file may vary where you report this income.
- Business Income: As a business owner, you must also pay taxes on your business's income distributions. This is especially true for owners of pass-through entities like an S Corporation or Limited Liability Company. If you earn business income, the IRS considers this ordinary income.
- Ordinary Dividends: Investors who own shares of a company that pays ordinary dividends must pay taxes on these earnings at their marginal tax rate. Many fixed-income investors who own dividend-paying stocks or mutual funds focusing on generating dividend income must include this as ordinary income. Dividend-paying companies help determine whether your dividend payment is ordinary or qualified and report this to the IRS on your Form 1099-DIV.
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Why Ordinary Income Matters
Your ordinary income affects how much you pay in taxes. Ordinary income is one of the layers used to determine the starting point for assessing how much taxable income you might have.
While there are other types of income, like short-term capital gains, ordinary income affects the annual tax filings of hourly workers, freelancers, and nonprofit and corporate employees.
All employees who receive Form W-2 must think about ordinary income and how it influences their annual tax filings.
2024 and 2025 Tax Rates
Here are the marginal tax rates for 2024 and 2025:
2024 Tax Rates
| Tax Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
|---|---|---|---|---|
| 10% | $0 – $11,600 |
$0 – $23,200 |
$0 – $11,600 |
$0 – $16,500 |
| 12% | $11,600 – $47,150 |
$23,200 – $94,300 |
$11,600 – $47,150 |
$16,500 – $63,100 |
| 22% | $47,150 – $100,525 |
$94,300 – $201,050 |
$47,150 – $100,525 |
$63,100 – $100,500 |
| 24% | $100,525 – $191,950 |
$201,050 – $383,900 |
$100,525 – $191,950 |
$100,500 – $191,950 |
| 32% | $191,950 – $243,700 |
$383,900 – $487,450 |
$191,950 – $243,725 |
$191,950 – $243,700 |
| 35% | $243,700 – $609,350 |
$487,450 – $731,200 |
$243,725 – $365,600 |
$243,700 – $609,350 |
| 37% | Over $609,350 |
Over $731,200 |
Over $365,600 |
Over $609,350 |
Source: Provided by the Internal Revenue Service [5]
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2025 Tax Rates
| Tax Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
|---|---|---|---|---|
| 10% | $0 – $11,925 |
$0 – $23,850 |
$0 – $11,926 |
$0 – $17,000 |
| 12% | $11,926 – $48,475 | $23,851 – $96,950 | $11,926 – $48,475 |
$17,001 – $64,850 |
| 22% | $48,476 – $103,350 | $96,951 – $206,700 | $48,476 – $103,350 | $64,851 – $103,350 |
| 24% | $103,351 – $197,300 | $206,701 – $394,600 | $103,351 – $197,300 | $103,351 – $197,300 |
| 32% | $197,301 – $250,525 | $394,601 – $501,050 | $197,301 – $250,525 | $197,301 – $250,500 |
| 35% | $250,526 – $626,350 | $501,051 – $751,600 | $250,526 – $375,800 | $250,501 – $626,350 |
| 37% | Over $626,351 | Over $751,601 | Over $375,801 | Over $626,351 |
Source: Provided by the Internal Revenue Service [6]
Learn More: 7 Steps to File Your Taxes
Business Income vs. Individual Income
- Business Income: Whether you run your own business or work for a startup or small business, knowing how business income is taxed is critical. Business income is generated from daily business operations – consulting, freelancing, selling products, or providing services. Business income does not include selling capital assets, like a building, equipment, or land. Capital gains are not considered regular business income.
- Individual Income: A quick money hack is to think of individual income as all your W-2 income. Form W-2s are issued by all companies from which you earned over $600 throughout the tax year.[7] For most, this includes income, tips, hourly wages, bonuses, and commissions earned throughout the year from their employer.
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Smart Summary
Ordinary income is taxed at your marginal tax rates. Ordinary income has two categories: individual and business income. For most tax filers, individual income includes your salary, bonus, hourly wages, tips, royalties, and commissions. On the other hand, business income includes income earned in business operations, like selling products, consulting, freelancing, or providing other services.
(1) Internal Revenue Service. What is taxable and nontaxable income? Last Accessed January 12, 2025.
(2) Tax Foundation. Marginal Tax Rate. Last Accessed January 12, 2025.
(3) Internal Revenue Service. Publication 550 (2023), Investment Income and Expenses. Last Accessed January 12, 2025.
(4) Internal Revenue Service. Topic no. 209, Capital gains and losses. Last Accessed January 12, 2025.
(5) Internal Revenue Service. Revenue Procedure 2023-34. Last Accessed January 12, 2025.
(6) Internal Revenue Service. Revenue Procedure 2024-40. Last Accessed January 12, 2025.
(7) Internal Revenue Service. About Form W-2, Wage, and Tax Statement. Last Accessed January 12, 2025.
