Income is a broad term used to desribe all sources of money obtained by individuals and households. It can include public benefits, gifts, interest payments etc.
Earnings are just one form of income. Specificallly compensation received for services performed for an employer
Earnings come in four main varieties
- A wage
- What an employer pays an employee to work
- usually wages are based on an hourly rate
- A salary
- Payment for work for a set period of time
- Usually an annual ammount
- A commission
- payment based on the sale of a product or service
- A bonus
- an extra payment usually based on performance
- In 2022 the US minimum wage was at $7.25 per hour
- This wage is periodically reset by Congress through the Fair Labor Standards Act, which was passed in 1938
- Workers that fall under the Fair Labor Standards Act must be paid at least 1.5 times their regular wage when they work overtime
- Overtime is defined as working more than 40 hours in one week
- Employers try to limit it as its costly for the business
Self Employment
If you are self employed, you earn income from a business you operate Being self employed means you
- set your own hours of work
- charge for your products or services
- pay your own taxes Self employed people can also be independent contractors, entering into agreements with businesses or individuals for specific tasks or functions
- Being self employed has many advantages such as freedom to set your own hours
- However, self employed individuals often work much more than 40 hours a week
- There’s also a large risk involved with small businesses and startups, only about 50% of them last 5 years. 33% are still around after 10
- The default legal structure of a self employed individual is a sole proprietorship
- Easy to startup and requires no legal registration or paperwork
- You are the owner and in charge of decisions
- Losses from your business can lower your tax liability
- You have unlimited liability, that is, you are totally responsible for any business debt and expenses
- There’s also various partnerships
- General partnerships
- Decision making done by a majority
- Capital (money used to start or expand the business) can be raised through the collective assets of the parteners
- Taxes are calculated on each partners share of income
- Each partners has unlimited liability for the entire partnership
- Limited partnerships
- A general partner manages the business and one or more limtied partners invest money in the partnership
- Limited liability partnerships
- Partners are not liable for the negligent actions of other partners, but are liable for the general obligations of the business
- One of the most popular small business structures is a limited liability company (LLC)
- An LLC shields the personal assets of the owneres from the liabiiltieis of the business
- If the business cannot pay its debts, creditors can claim the assets of the business but not the assests of the owner
- LLCs are similar to partnerships in structure but limit liabilty much better
- There are higher legal costs, but the added liabilty protection generally outweighs the additional costs
- Corporations allow the owner to avoid being personally responsible for the liabilities of the business
- A legal structure that is separate from the owners of the business
- Very effective at limiting liability but also expensive to form and maintain