Although the words "earnings" and "wages" are often used interchangeably, the differences between the two can be significant. When someone has no income other than wages, it's correct to use the terms to mean the same thing. But for people with interest-bearing bank accounts, rental income, retirement benefits, stock dividends or annuities, the two words mean different things.
Wages and Salary Defined
Wages are the money your employer pays you for the hours you work each week. A salary, on the other hand, typically defines a fixed amount your employer pays you, not necessarily for specific hours worked but for completing the duties of your job. Some weeks you may work more or fewer hours than the hours that constitute a normal workweek, but you are paid the same amount nevertheless. In both cases, however, you're paid for your "service" to your employer.
Earnings can describe a variety of sources of income. It can include wages and salary, but it also describes funds you receive from nonworking income. Interest paid on your bank savings accounts and dividends you receive on stock investments are common examples of earnings. You didn't work for the bank that paid you interest, nor did you work to earn the stock dividends you received. If you receive royalties, rent or payment for service as an independent contractor, you also have earnings that are neither wages nor salary.
Identifying Income Sources
While wages and earnings may be different sources of income, you'll usually include both in your year-end tax filing. Some earnings, such as municipal bond interest or Social Security income, might not be subject to income taxes. However, most earnings, minus those qualified expenses you incurred in generating this money, are included in your annual gross income for tax purposes. Some income sources, such as sales of stock or investments, are taxed differently if you've owned the investment longer than one year. These are called long-term capital gains and are taxed at a range of 15% to 20% depending upon your specific tax bracket for ordinary income.
Defining Residual Income
Often also called "passive" income, residual income is not a wage, but it is an earning. Residual income is generated by a service you performed in the past, whether as an employee earning wages or an independent contractor. It is income or earnings, but not wages, since you are no longer working for or performing service for the company paying you. Examples of residual or passive income include royalties for authoring a book, royalties for a patent or invention or money you receive for capturing an account that continues to generate revenue.
Commissions and Fees
Depending on your relationship to the source of commissions and fees, this income might be wages or earnings. If you are a W-2 employee for the company paying you commissions, this income is a component of your wages. If you are a broker, middleman or consultant, this income source is more correctly called earnings. You worked to earn this income, but not as an employee of the company that pays you.
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