The money received by those who are self-employed is called earned income. According to the IRS, a self-employed person is anyone who runs a business as a sole proprietor or is an independent contractor. The law requires all citizens to file tax returns even if they are self-employed. An individual is expected to be honest in reporting their earned income.
Earned income should never be confused with gross income, because the latter includes dividends and interest payments. When we talk about earned income, we are referring to the compensation that one receives for providing a service or selling an item. A bonus is an example of earned income because it comes directly from your efforts. Since dividends are offered to shareholders without their effort, they are not part of earned income. Public companies offer dividends to shareholders to show them that the firm is doing well. It is the management’s way of appreciating those that have a stake in the firm.
A self-employed person that reports and files earned income is eligible for a tax credit. The earned income tax credit (EITC) amount is often determined by the number of dependents that the individual has. For example, a person with three children will receive a higher EITC than an individual who has only one child.