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Daniel Liberto is a journalist with over 10 years of experience working with publications such as the Financial Times, The Independent, and Investors Chronicle.
Updated December 11, 2023 Reviewed by Reviewed by Lea D. UraduLea Uradu, J.D. is a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, and Tax Writer.
Fact checked by Fact checked by Yarilet PerezYarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.
Part of the Series Income Tax Term GuideTypes of Income
Tax Types and Terms
Ordinary income is any income earned by an organization or an individual taxable at marginal tax rates. It can include wages, salaries, tips, bonuses, commissions, rents, royalties, short-term capital gains, unqualified dividends, and interest income.
Ordinary income comes in two forms: personal income and business income. Personal ordinary income can be defined as cash inflow subject to the standard marginal income tax rates and defined by the Internal Revenue Service (IRS).
For businesses, ordinary income is generated from regular day-to-day business operations—excluding any income earned from the sale of long-term capital assets, such as land or equipment.
Long-term capital gains and qualified dividends are taxed differently and not considered to be ordinary income.
Marginal rates for tax years 2023 and 2024 that are applied to ordinary income for individuals and married couples are:
| 2023 Tax Year | ||
|---|---|---|
| Income Individual Single Taxpayer | Income Married Couples Filing Jointly | |
| 37% | Over $578,125 | Over $693,750 |
| 35% | Over $231,250 | Over $462,500 |
| 32% | Over $182,100 | Over $364,200 |
| 24% | Over $95,375 | Over $190,750 |
| 22% | Over $44,725 | Over $89,450 |
| 12% | Over $11,000 | Over $22,000 |
| 10% | Less than $11,000 | Less than $22,000 |
| 2024 Tax Year | ||
|---|---|---|
| Income Individual Single Taxpayer | Income Married Couples Filing Jointly | |
| 37% | Over $609,350 | Over $731,200 |
| 35% | Over $243,725 | Over $487,450 |
| 32% | Over $191,950 | Over $383,900 |
| 24% | Over $100,525 | Over $201,050 |
| 22% | Over $47,150 | Over $94,300 |
| 12% | Over $11,600 | Over 23,200 |
| 10% | Less than $11,600 | Less than $23,200 |
Ordinary income for individuals typically consists of the salaries and wages earned from their employers before taxes. A person who holds a customer service job at Target and earns $3,000 per month will have a calculated annual ordinary income of $36,000, or $3000 X 12 months.
This $36,000 is taxed on their year-end tax return as gross income. If the individual also owned rental property and earned $1,000 a month in rent, ordinary income would increase to $48,000 per year ($36,000 plus $12,000).
Deductions can reduce the amount of ordinary income subject to tax.
A company's ordinary income is the pretax profit from selling its products or services. Retailer Target made $109.1 billion in total revenue in its fiscal year (FY) ending Jan. 28, 2023. However, those sales cost money to generate.
The company claimed costs attributable to the production of goods sold (COGS) were $82.2 billion. Target also spent $20.6 billion on selling, general, and administrative expenses (SG&As). Factor in depreciation and amortization, and ordinary income or operating income totals $3.9 billion, the amount of income subject to taxation.
Most stock dividends on long-term investments are subject to a lower rate than ordinary income. The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) reduced the tax on most dividend income and some capital gains to 15%. This change prompted companies to increase or pay dividends instead of holding onto their cash.
In 2017, President Donald Trump signed the Tax Cuts and Jobs Act (TCJA) into law, which changed the tax rate on qualified dividends to 0%, 15%, or 20%, based on an individual’s taxable income and filing status. Unqualified dividends include those paid out by real estate investment trusts (REITs), income paid on employee stock options (ESOs), and dividends paid by tax-exempt companies and on savings accounts or money market accounts.
Regular dividends paid out to shareholders of for-profit companies usually qualify for taxation at the reduced capital gains rate, but investors must adhere to minimum holding periods.For common stock, a share must be held for more than 60 days during the 121-day holding period that begins 60 days before the ex-dividend date. For preferred stock, the holding period is longer, beginning 90 days before the company’s ex-dividend date.
Most of an individual's income will be taxed at the regular marginal tax rates. There are exceptions where income won't be taxed. These exceptions include long-term capital gains and qualified dividends, both taxed at more favorable rates.
Rental income is defined by the IRS as “any payment for the use or occupation of property” and is generally taxed as ordinary income. However, landlords can deduct certain costs from this income to reduce the figure at which the income is taxed. Deductible expenses may include mortgage interest, property tax, repair costs, advertising, maintenance and cleaning, condo fees, and homeowners insurance.
Most interest is taxed as ordinary income and subject to ordinary income tax rates. Notable exceptions include interest earned from a Series EE or Series I bond issued after 1989 to pay qualified higher educational expenses, interest on insurance dividends left on deposit with the U.S. Department of Veterans Affairs, and interest on some bonds used to finance government operations. However, even when it’s not taxable, interest must be reported.
Ordinary income is taxed at marginal rates. Individuals pay taxes on ordinary income, such as salaries, tips, rent, and interest. Businesses earn ordinary income from business operations while supplying goods and services.
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Description Part of the Series Income Tax Term GuideTypes of Income
Tax Types and Terms
Tax liability is the amount an individual, business, or other entity is required to pay to a federal, state, or local government.
Earned income includes wages, salaries, bonuses, commissions, tips, and net earnings from self-employment. On your taxes, it is treated differently than unearned income.
Passive income is earnings from a rental property, limited partnership, or other enterprise in which a person is not actively involved.
A flow-through entity is a legal business entity that passes income to the owners and/or investors of the business. It's sometimes referred to as a disregarded entity.
A qualified higher education expense is a tax credit for the parents of students attending a college or other post-secondary institution.
A filing extension is an exemption made for taxpayers who are unable to file their federal tax return by the regular due date.
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