10.2.3 Earned Income

Earned income includes wages, salaries, tips, and other employee compensation (but only if these are includible in gross income)1  plus net earnings from self-employment.2  Earned income may also include an employer’s disability retirement plan benefits until the worker reaches minimum retirement age.

Earned income does not include pensions, annuities, unemployment compensation, social security, welfare, alimony, child support, inmate compensation, nontaxable workfare payments, and scholarship or fellowship grants not reported on a Form W-2.

If a married couple in a community property state such as Louisiana has been separated for more than 6 months and is separated at the end of the year, one spouse may elect to file a separate return as a “Head of Household” and use their own earned income to qualify for the EIC.

Proof of “earned income such as W-2 or 1099 Forms may be required by the IRS. Self-employed individuals should have records of their income, such as check stubs, bank statements showing deposits, or other business records.

• 1Prior to 2002, earned income included nontaxable earned income, e.g., voluntary salary reductions, 401(k) contributions, mandatory contributions to a state or local retirement plan, etc.
• 2Compensation paid by a third party for damages due to lost self-employment income will not constitute “earned income” for the purposes of the EIC.