In your day-to-day activities, your definition of income will generally focus on the amount you are left with after paying tax or the disposable income. There is no general or standard definition of income since it can be defined in various contexts, such as financial accounting, for taxation or economic analysis purposes. For employed individuals, self-employed individuals, businesses, firms, and companies, Income generally translates to the amount or value they receive for their products, services, or/ and labor. In a general context, income refers to the amount of property, money, and other value transfers received in a specific period by individuals, companies, business entities, and firms as compensation for payment of goods, services, gifts, pension, return on investments and other transfers of value. In 2022 there have been essential terms you should be conversant with when it comes to an understanding of what income is.
10 Essential Terms to Know in 2022
Income is a term that is frequently used in our lives, as this income designs your lifestyle, expenses, and success. The COVID-19 pandemic that is still affecting the economic progress of the global economy in 2022 affected income significantly. As the economy recovers from the ravaging recession brought by the COVID pandemic, it’s crucial to understand these ten essential terms in 2022 regarding income.
1. Active income
Active income is the amount you receive from products and services. This includes salaries, wages, commissions, tips, and income from your other businesses in which you have had material participation.
2. Passive Income
You earn this income from a limited partnership, rental property, or other enterprises in that you are not actively involved. A citizen of the internal revenue service considers passive income a business income where the citizen is not actively involved and rental income. You can make passive income by investing in mutual funds, teaching online, and selling products online since they require minimal to no labor. According to the internal revenue service, passive income is taxable at the same rate as personal income.
3. Disposable Income
It is crucial to pay taxes as they play an essential role in running the economy. Once these taxes are deducted from your income, you are left with disposable income. It indicates the amount a household or individual is left with for savings and spending after taxation.
4. Gross Income
Gross income is an employee’s total amount before taxes or other deductions such as insurance payments. Mainly this term appears at the top of your paystubs.
5. Imputed Income
Imputed income is employee benefits that are counted on your income bracket and are taxable. Some of the employee’s benefits may be exempted from tax, such as health, life insurance, and meal benefits.
6. Annual Income
Annual income includes all the active and passive income in a year such as 2022. This annual income includes your annual overtime payments; yearly tips earned commissions, bonuses, annual salary, and any other amount earned actively or passively. There are two types of yearly incomes, and the annual tax deduction determines them. Gross annual income is the yearly earnings a business or individual has made without tax deductions in that fiscal year. On the other hand, net yearly income represents your annual income earned after tax deductions.
7. Debt-Income-Ratio (DIR)
In 2022 the Debt-Income-Ratio is an important term as it has been affected by the ravaging covid-19 pandemic. Your debt-income ratio gives the comparison between your monthly earnings and how much you owe in a month. Generally, the balance is the percentage between your gross earnings and your monthly payments, such as rent, credit card, other debts, and mortgage. These monthly bills do not include other expenses such as taxes, utilities, and gas. The pandemic affects the debt-income ratio since the economy has been affected and income reduced, whereas the bills are not decreasing in cost. DIR is crucial in determining your borrowing risk as it gives you the percentage of your gross earnings going to pay the debt.
8. Income tax
Income tax is one of the most significant sources of revenue for many governments across the globe in any fiscal year. Income tax is the tax levied by your government, whether state or federal, on your income, especially annual taxation on personal income. Some earnings subject to this kind of taxation include divides, salaries, wages, gambling wins, rents, and sales of products. The biggest revenue generator for the US federal government is the income tax.
9. Net Income
Net income is the amount a business, company, or individual makes after paying taxes and deducting allowances and costs. As an individual, you can better understand this term as what is left after your gross income is deducted from health insurance, tax, and retirement contributions. This income appears at the bottom of the paystubs since all deductions have been made. For a profit-making entity, net income is commonly referred to as net profit as all expenses and overheads have been deducted.
10. Unemployment Income
Unemployment income is mainly referred to as unemployment benefits. This is a crucial term, especially during and after the COVID-19 pandemic, since the unemployment rate and income generation have been greatly affected. Unemployment income is a temporary income paid by the government to unemployed workers who have lost their job or due to other reasons but not their fault. The primary goal of this income is to provide social progress and safety to the unemployed while they are searching for a job. Those who quit their jobs with no reasonable explanations do not qualify for the unemployment income. Unemployment benefits are taxable as other incomes.