Ordinary income is any money you receive that the IRS taxes at your regular tax rate, rather than at a lower capital gains rate

Ordinary income includes your salary, wages, tips, interest from savings accounts and bonds, rental income, and profits from selling business inventory or assets you held for a year or less. It also covers income from self-employment, retirement account withdrawals, and certain investment distributions. The IRS taxes ordinary income at rates that depend on your filing status and total income for the year — these rates range from 10% to 37% as of 2024, though these percentages change annually.

The key distinction is that ordinary income gets taxed at your marginal tax rate — the percentage bracket you fall into based on your total earnings. This is different from long-term capital gains, which are taxed at lower rates (0%, 15%, or 20%) if you held the investment for more than a year before selling.

Key Takeaways

  • Wages, salaries, bonuses, and tips are ordinary income and taxed at your full marginal rate.
  • Interest from savings accounts, money market accounts, and bonds counts as ordinary income, not capital gains.
  • Rental income from property you own, minus deductible expenses, is ordinary income.
  • Profits from selling assets you held for one year or less are ordinary income; profits from assets held longer may may have access to for lower capital gains rates.
  • Retirement account withdrawals, including traditional IRA and 401(k) distributions, are taxed as ordinary income.

Wages, salaries, and employment income

Any money your employer pays you — whether as a salary, hourly wage, bonus, or commission — is ordinary income. This includes overtime pay, shift differentials, and severance packages. Your employer withholds federal income tax from these payments and reports them to the IRS on your W-2 form at the end of the year.

Tips are also ordinary income. If you receive tips, you must report them to your employer, and they will be included in your W-2. If tips are not reported to your employer, you still owe tax on them and should report them on your tax return.

Interest and dividend income

Interest you earn from savings accounts, money market accounts, certificates of deposit (CDs), and bonds is ordinary income. Banks and financial institutions report this interest to you on a 1099-INT form. Even if the interest rate is very low, you must report it.

Ordinary dividends paid by corporations are also taxed as ordinary income. These are different from may have access to dividends, which may receive preferential capital gains treatment. Your brokerage will tell you on a 1099-DIV form which dividends are ordinary and which are may have access to. Dividends from real estate investment trusts (REITs) are typically ordinary income as well.

Self-employment and business income

If you run your own business or work as an independent contractor, your net business income is ordinary income. You calculate this by subtracting your business expenses from your gross revenue. You report this on Schedule C and pay both income tax and self-employment tax on the amount.

Self-employment tax covers Social Security and Medicare contributions and is in addition to regular income tax. Even if your business operates at a loss, you may still need to file and report the loss, as it can offset other income or be carried forward to future years.

Rental income and real estate

Rent you collect from tenants is ordinary income. You report the total rent received, then subtract deductible expenses such as mortgage interest, property taxes, insurance, repairs, utilities, and depreciation. The net amount — your rental income minus these expenses — is what you owe tax on.

If you sell rental property, the profit may be treated differently depending on how long you owned it. If you held it for more than a year, the gain may may have access to for capital gains treatment. If you held it for one year or less, the entire gain is ordinary income. Depreciation you claimed in prior years is also recaptured and taxed at a higher rate when you sell.

Retirement account distributions

Withdrawals from traditional IRAs, 401(k)s, 403(b)s, and similar retirement plans are taxed as ordinary income in the year you withdraw them. This is true whether you withdraw the money before retirement, at retirement, or after. The full amount of the distribution (except for any portion that represents after-tax contributions you made) is ordinary income.

Roth IRA withdrawals are different: if you meet the rules, may have access to distributions are not taxed at all. However, if you withdraw earnings before age 59½ and before the account has been open for five years, those earnings are taxed as ordinary income plus a 10% penalty.

Other sources of ordinary income

Gambling winnings are ordinary income and must be reported on your tax return. Prizes and awards you win are also ordinary income, with limited exceptions for certain scholarships and employee achievement awards. Forgiven debt — such as when a creditor cancels a loan — is generally ordinary income, though some exceptions exist for certain types of debt forgiveness.

Alimony received is ordinary income (under current law for divorces finalized after 2018). Unemployment benefits are ordinary income. Income from rental of personal property, such as renting out equipment or a vehicle, is ordinary income. Barter income — the fair market value of goods or services you receive in exchange for your own goods or services — is also ordinary income.

Frequently Asked Questions

Is interest from my savings account ordinary income?

Yes. All interest from savings accounts, money market accounts, and CDs is ordinary income taxed at your full marginal rate. Your bank will send you a 1099-INT form reporting the interest, and you must include it on your tax return even if the amount is small.

What's the difference between ordinary income and capital gains?

Ordinary income is taxed at your regular tax rate (10% to 37%). Long-term capital gains — profits from selling assets you held for more than a year — are taxed at lower rates (0%, 15%, or 20%). Short-term capital gains (assets held one year or less) are taxed as ordinary income.

Are retirement account withdrawals always ordinary income?

Traditional IRA and 401(k) withdrawals are taxed as ordinary income. Roth IRA may have access to distributions are not taxed. If you withdraw Roth earnings early, those earnings are taxed as ordinary income plus a 10% penalty, though some exceptions exist.

Do I have to report small amounts of interest or dividend income?

Yes. The IRS requires you to report all interest and dividend income, regardless of amount. Your financial institution reports it to the IRS on a 1099 form, so the IRS will know if you receive it. Failing to report creates a mismatch with IRS records.

Is rental income ordinary income even if I own the property long-term?

Yes. Rental income you collect from tenants is ordinary income each year you own the property. If you later sell the property at a profit, that profit may may have access to for capital gains treatment if you held it for more than a year, but the annual rent is always ordinary income.