Ordinary income definition

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What is Ordinary Income for an Individual?

For an individual, ordinary income is most earnings other than long-term capital gains. These earnings include wages and salaries, as well as bonuses, tips, commissions,  interest income, and short-term capital gains. Ordinary income is taxed at the highest tax rate. This type of income can be offset with standard tax deductions to arrive at taxable income for the individual.

Examples of Ordinary Income for an Individual

An example of ordinary income for an individual is the salary or wages they earn from their job. For instance, if someone works as a teacher and earns $50,000 per year in salary, this income is considered ordinary income and is subject to federal and state income taxes, as applicable.

Other examples of ordinary income for individuals include:

  • Bonuses from employment.

  • Commissions earned by sales professionals.

  • Income from freelance or contract work.

  • Interest income from savings accounts (excluding tax-exempt interest).

  • Dividends from stocks (non-qualified dividends).

These types of income are taxed at the individual's standard income tax rate.

What is Ordinary Income for a Business?

For a business, ordinary income is the income from continuing operations before income taxes, excluding discontinued operations and the cumulative effect of changes in accounting principles. This is essentially the income generated by the core activities of a business, so outside analysts tend to focus on this number in order to discern the true underlying performance of a business.

FAQs

How Does Ordinary Income Differ From Capital Gains?

Ordinary income comes from wages, business profits, interest, and other recurring sources, and it is taxed at standard income tax rates. Capital gains arise from selling investments or assets, with long-term gains often qualifying for lower preferential tax rates. The main difference is that ordinary income is taxed at regular brackets, while capital gains may receive favorable tax treatment depending on the holding period.