unearned income

Meaning

Unearned income is income acquired through sources other than employment or active business operations, such as investment dividends, interest, rent from properties, or capital gains. In accounting, it can also refer to 'deferred revenue'—money received from a customer before the service or good has been delivered. It is typically taxed differently than earned income, such as wages or salaries.

Examples

• Her investment portfolio generates a steady stream of unearned income through quarterly dividends.

  Her investment portfolio generates a steady stream of unearned income through quarterly dividends.

• The tax code imposes different rates on earned wages compared to passive unearned income.

  The tax code imposes different rates on earned wages compared to passive unearned income.

• In accounting, cash received in advance is recorded as unearned income on the balance sheet.

  In accounting, cash received in advance is recorded as unearned income on the balance sheet.

• Retirees often rely heavily on unearned income from pensions and government bonds.

  Retirees often rely heavily on unearned income from pensions and government bonds.

• We cannot recognize this payment as revenue yet; it must remain classified as unearned income until the project is complete.

  We cannot recognize this payment as revenue yet; it must remain classified as unearned income until the project is complete.

Common Mistakes

• ✗ I don't work, so my salary is unearned income.

  ✓ I don't work, so my living is funded by unearned income from my investments.

  A salary is by definition 'earned income' because it is paid for active labor. Unearned income comes from assets, investments, or is deferred revenue.

• ✗ The company earned some unearned income this month.

  ✓ The company received unearned income for services to be performed next quarter.

  'Earned unearned income' is a contradiction. Use 'received' or 'recorded' unearned income to describe deferred revenue.

Related Expressions

Practice

• Dividends and rental yields are common examples of ___.

  💡 Income not derived from active employment or labor.

  Show answer

  unearned income

• Because we haven't shipped the goods yet, the prepayment must be categorized as ___ on our balance sheet.

  💡 Cash received before delivery of services or goods.

  Show answer

  unearned income