What counts as income the IRS wants to know about

Income for tax purposes is any money or thing of value you receive that the IRS expects you to report. This includes wages from a job, tips, self-employment earnings, interest from a bank account, rental income, and profits from selling something. It also includes unemployment benefits, Social Security (in some cases), and money you won in gambling or a lawsuit. The IRS has a broad definition: if you received it and it improved your financial position, it probably counts.

The key distinction is between taxable income and non-taxable income. Some money you receive does not have to be reported to the IRS at all. Gifts, inheritances, and life insurance payouts are generally not taxable. Certain scholarships and fellowships used for tuition are not taxable. Reimbursements for medical expenses you paid out of pocket are not taxable. The IRS publishes a list of non-taxable items, and if you are unsure whether something counts, that list is the place to check.

Key Takeaways

  • Wages, self-employment income, tips, interest, dividends, rental income, and capital gains all count as taxable income and must be reported on your tax return.
  • The IRS uses forms like W-2s, 1099s, and 1098s to track income reported by employers, banks, and other payers, so underreporting is usually caught.
  • Some income is not taxable at all, including gifts, inheritances, certain scholarships, and life insurance proceeds, and does not need to be reported.
  • Self-employed people count income as gross receipts minus business expenses, and must report this on Schedule C even if the net profit is small.
  • If you receive income in a form other than cash — such as bartered goods or cryptocurrency — you still owe tax on its fair market value at the time you received it.

Income from wages, tips, and self-employment

Wages are the most straightforward form of income. Your employer reports what they paid you on a W-2 form, which they send to you and the IRS by January 31. You report this amount on your tax return. Tips you receive are also taxable income, whether they are cash tips or credit card tips. If you work in a tipped industry, you are required to report all tips to your employer, and they will include them on your W-2.

Self-employment income is income you earn from running your own business or working as an independent contractor. This includes money from freelance work, consulting, selling items online, or operating a small business. You count this income as your gross receipts — the total money you brought in — minus your business expenses. Business expenses are things you spent money on to earn that income: supplies, equipment, rent for an office space, mileage, or fees you paid to other people. You report self-employment income on Schedule C, which is part of your tax return. Even if your net profit is very small or you had a loss, you are still required to file Schedule C if you had self-employment income.

The IRS also expects you to pay self-employment tax, which covers Social Security and Medicare. This is separate from income tax. You calculate self-employment tax on Schedule SE using your net profit from Schedule C. Self-employed people typically owe more in total tax than wage earners because they pay both the employer and employee portions of these taxes.

Interest, dividends, and investment income

Money your bank account or savings account earns in interest is taxable income. Banks report this to you on a 1099-INT form if you earned $10 or more in a year. You report this amount on your tax return even if you did not receive a 1099-INT. Dividends from stocks or mutual funds are also taxable income and are reported on a 1099-DIV form.

Capital gains — the profit you make when you sell an investment or property for more than you paid for it — are taxable income. If you held the investment for more than one year before selling, it is a long-term capital gain and is taxed at a lower rate than ordinary income. If you held it for one year or less, it is a short-term capital gain and is taxed at your regular income tax rate. You report capital gains on Schedule D.

Losses on investments can reduce your taxable income. If you sold an investment for less than you paid for it, you can deduct that loss. However, there are limits: you can deduct up to $3,000 in net capital losses per year against ordinary income, and you can carry unused losses forward to future years.

Rental income and property-related income

If you rent out a house, apartment, or room, the rent you receive is taxable income. You report it on Schedule E. Like self-employment income, you can deduct expenses related to the rental: property taxes, mortgage interest, insurance, repairs, utilities, and depreciation of the building. You report your net rental income (rent minus expenses) on your tax return.

If you sold a rental property or your home, the gain is taxable as a capital gain. However, if you sold your primary residence — the house you lived in — you may be able to exclude up to $250,000 of the gain from tax if you meet certain conditions: you owned it and lived in it for at least two of the last five years. If you are married filing jointly, the exclusion is up to $500,000.

Income reported on 1099 forms

The IRS requires certain payers to report income they paid you on 1099 forms. These forms come from banks, investment firms, employers who paid you as a contractor, and other sources. The most common types are:

  • 1099-NEC: Non-employee compensation, usually from self-employment or contract work.
  • 1099-MISC: Miscellaneous income, including prizes, awards, and payments from certain sources.
  • 1099-INT: Interest income from banks and other financial institutions.
  • 1099-DIV: Dividend income from investments.
  • 1099-B: Proceeds from the sale of securities or other investments.
  • 1099-K: Payment card transactions or third-party network transactions (such as PayPal or Venmo).

The payer sends you a copy of the 1099 and also sends a copy to the IRS. This means the IRS already knows about this income. If you do not report it on your tax return, the IRS will notice the discrepancy. You must report all income shown on 1099 forms, even if you disagree with the amount or believe it should not be taxable.

Income that is not taxable

Not all money you receive is taxable. Gifts are not taxable income to you, even if they are large. Your parents can give you $10,000 and you do not owe income tax on it. Inheritances are not taxable income. If someone leaves you money or property in their will, you do not report it as income on your tax return (though the estate itself may owe estate tax, which is a different matter).

Life insurance proceeds paid to you because someone died are not taxable. Certain scholarships and fellowships used to pay tuition, fees, books, and supplies are not taxable. However, scholarships used for room and board are taxable. Reimbursements for medical expenses you paid out of pocket are not taxable if they come from your employer's health plan or certain other sources. Workers' compensation benefits are not taxable. Certain disability benefits are not taxable. The IRS publishes a full list of non-taxable income in Publication 525.

Barter, cryptocurrency, and other forms of income

If you receive something other than cash as payment — such as goods, services, or cryptocurrency — you still owe tax on it. The taxable amount is the fair market value of what you received at the time you received it. If you traded your accounting services for a used car, you count the fair market value of that car as income. If you received Bitcoin as payment for work, you count the dollar value of that Bitcoin on the day you received it as income.

Cryptocurrency is treated as property by the IRS. When you receive it, you report its fair market value in U.S. dollars as income. When you later sell or trade it, you owe tax on any gain (or can deduct any loss). This applies whether you received the cryptocurrency as payment, as a gift (gifts are not taxable, but you owe tax on gains when you sell), or through mining or staking.

Frequently Asked Questions

Do I have to report income if I did not receive a 1099 or W-2?

Yes. You are required to report all taxable income, whether or not you receive a form. If you earned cash tips, sold items online without receiving a 1099-K, or had other income, you still owe tax on it. The IRS may not catch it immediately, but underreported income can trigger an audit.

Is unemployment income taxable?

Yes, unemployment benefits are taxable income. You report them on your tax return. Some states allow you to have taxes withheld from your unemployment payments, which reduces what you owe at tax time. Check with your state's unemployment office about withholding options.

What if I received money from a lawsuit or settlement?

It depends on what the lawsuit was for. Settlements for physical injury or sickness are generally not taxable. Settlements for lost wages, emotional distress, or other non-physical injuries are taxable. The settlement agreement or the payer should specify which portion, if any, is taxable.

Do I count money I borrowed as income?

No. Loans are not income because you have to repay them. If someone lends you $5,000, you do not report it as income. However, if the lender forgives the loan and you no longer have to repay it, that forgiven amount may be taxable income to you.

Is Social Security taxable?

It depends on your total income. If Social Security is your only income, it is not taxable. If you have other income, a portion of your Social Security benefits may be taxable. The IRS uses a formula based on your combined income (adjusted gross income plus non-taxable interest plus half your Social Security benefits). You receive a SSA-1099 form showing your benefits, and you report the taxable portion on your return.