The Internal Revenue Service and the Social Security Administration define unearned compensation as all income not earned through your business or job. Both organizations have specific guidelines for what qualifies as unearned compensation. The IRS guidelines are for computing taxation and the SSA guidelines are for computing Supplemental Security Income. SSI benefit payments may be more, or less, depending on the amount of income you receive from all sources. Though the IRS definition generally refers to taxable income, not all income defined as "unearned compensation" is taxable. Child support, for instance, is not taxed.
According to the IRS and the SSA, government and state compensation in the form of social security payments, government pensions, and unemployment benefits are classified as unearned compensation. Additionally, the SSA specifies Veteran’s Administration benefits and state disability benefits as types of government compensation that are considered unearned compensation.
Both the IRS and the SSA classify private pensions, child support and spousal support as unearned income. The IRS also classifies interest and dividends as unearned compensation. Other private compensation that the SSA classifies as unearned includes rental income, worker’s compensation and proceeds from life insurance policies. The SSA also specifies settlements and court-ordered awards, as unearned income.
Other Non-Work Income
Any remuneration from lotteries, prizes, contributions and cash or property inheritances is classified as unearned compensation by the SSA. Gifts, including cash or the value of shelter or food, are also placed in this category by the SSA, unless the assistance is based on need and provided by non-profit agencies, state or local government. Gifts for tuition and educational expenses are not included as compensation. Expenses not related to food or shelter, such as medical or utility bills, that are paid for you by someone else are not considered unearned compensation by the SSA. Loans that you must repay are not classified as unearned compensation.
The SSA includes strike pay and any other benefits from unions as unearned compensation, along with railroad retirement and railroad unemployment benefits. Black lung benefits and annuities are among the other types of compensation that the SSA considers as unearned. Small amounts of other income that you may receive infrequently or irregularly do not count as compensation of any kind by the SSA.
- IRS: Example of Income that is Not Considered Earned
- Internal Revenue Service. "Unearned Income." Accessed Nov. 22, 2019.
- Social Security Administration. "What is 'unearned income'?" Accessed Nov. 22, 2019.
- Internal Revenue Service. "Publication 590-A (2018), Contributions to Individual Retirement Arrangements (IRAs)." Accessed Nov. 22, 2019.
- Internal Revenue Service. "What is Earned Income?" Accessed Nov. 22, 2019.
- 26 U.S.C. 21 - Federal Insurance Contributions Act. "Section 2102: Deduction of tax from wages." Accessed Nov. 22, 2019.
- Internal Revenue Service. "Publication 550 (2018), Investment Income and Expenses." Accessed Nov. 22, 2019.
Katherine Kally is a freelance writer specializing in eco-friendly home-improvement projects, practical craft ideas and cost-effective decorating solutions. Kally's work has been featured on sites across the Web. She holds a Bachelor of Science in psychology from the University of South Carolina and is a member of the Society of Professional Journalists.