# Ordinary Income: What It Is and How It’s Taxed

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## What Is Ordinary Income?

Ordinary income is income earned by an entity or an individual that is taxable at marginal tax rates. It can include wages, salaries, tips, bonuses, commissions, rents, and royalties.

Unearned income such as short-term capital gains, unqualified dividends, and interest income is also ordinary income taxed at marginal (ordinary) tax rates.

### Key Takeaways

*   Ordinary income is any income taxable at [marginal tax rates](https://www.investopedia.com/terms/m/marginaltaxrate.asp).
*   Examples of ordinary income include wages, salaries, tips, bonuses, commissions, rents, royalties, [short-term capital gains](https://www.investopedia.com/articles/personal-finance/101515/comparing-longterm-vs-shortterm-capital-gain-tax-rates.asp), unqualified dividends, and interest income.
*   For individuals, ordinary income usually consists of the pretax salaries and wages that they have earned.
*   It can also be [unearned income](https://www.investopedia.com/terms/u/unearnedincome.asp#:~:text=Interest%20and%20dividend%20income%20are,Checking%20and%20savings%20deposit%20accounts) such as short-term capital gains, unqualified dividends, and interest income.
*   In a corporate setting, ordinary income comes from regular day-to-day business operations, excluding income gained from selling capital assets.

## Individual Income vs. Business Income

Ordinary income comes in two forms: personal income and [business income](https://www.investopedia.com/terms/b/businessincome.asp). 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](https://www.investopedia.com/terms/c/capitalasset.asp) such as land or equipment.

> **Important**
>
> Long-term capital gains and qualified dividends are taxed differently and are not considered to be ordinary income.

## How Ordinary Income Is Taxed: Marginal Tax Rates

The marginal rates for tax years 2024 and 2025 that are applied to ordinary income for individuals and married couples are:

## Examples

### Individuals

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 × 12 months.

This $36,000 is taxed on their year-end tax return as [gross income](https://www.investopedia.com/terms/g/grossincome.asp). 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).

> **Tip**
>
> Deductions can reduce the amount of ordinary income subject to tax.

### Businesses

A company’s ordinary income is the [pretax profit](https://www.investopedia.com/terms/p/profitbeforetax.asp) gained from selling its products or services. Retailer Target made $107.4 billion in total revenue in its fiscal year (FY) ending Feb. 3, 2024. However, those sales cost money to generate.

The company stated that its [cost of sales](https://www.investopedia.com/ask/answers/112614/whats-difference-between-cost-goods-sold-cogs-and-cost-sales.asp) was $77.7 billion. Target also spent $21.5 billion on selling, general, and administrative expenses (SG&As). Factor in depreciation and amortization, and ordinary income or [operating income](https://www.investopedia.com/terms/o/operatingincome.asp) totaled $5.7 billion, the amount of income subject to taxation.

## Dividends and Taxes

Most [stock dividends](https://www.investopedia.com/terms/s/stockdividend.asp) on long-term investments are subject to a lower rate than that for 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)](https://www.investopedia.com/taxes/how-gop-tax-bill-affects-you/) into law, which changed the tax rate on [qualified dividends](https://www.investopedia.com/terms/q/qualifieddividend.asp) 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)](https://www.investopedia.com/terms/r/reit.asp), 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](https://www.investopedia.com/terms/h/holdingperiod.asp).

For [common stock](https://www.investopedia.com/terms/c/commonstock.asp), 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](https://www.investopedia.com/terms/e/ex-dividend.asp). For [preferred stock](https://www.investopedia.com/terms/p/preferredstock.asp), the holding period is longer, beginning 90 days before the company’s ex-dividend date.

## What Is Taxed As Ordinary Income?

Most of an individual’s income will be taxed at the regular marginal tax rates. There are [exceptions](https://www.investopedia.com/articles/personal-finance/062716/types-income-irs-cant-touch.asp) where income won't be taxed. These exceptions include long-term capital gains and qualified dividends, both taxed at more favorable rates.

## Is Rent Ordinary Income?

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 taxable amount. Deductible expenses may include mortgage interest, property tax, repair costs, advertising, maintenance and cleaning, condo fees, and homeowners insurance.

## Do Individuals Have to Report Interest Income?

Yes, they do. 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 education expenses](https://www.investopedia.com/terms/q/qhee.asp), 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.

## The Bottom Line

Ordinary income is taxed at marginal rates. Individuals pay taxes on ordinary income such as salaries, tips, rent, and interest income. Businesses earn ordinary income from business operations while supplying goods and services.

> **Article Sources**
>
> 1.  Internal Revenue Service. “[Publication 525: Taxable and Nontaxable Income](https://www.irs.gov/pub/irs-pdf/p525.pdf).”
>     
> 2.  Internal Revenue Service. “[Publication 550, Investment Income and Expenses](https://www.irs.gov/publications/p550).”
>     
> 3.  Internal Revenue Service. “[Topic No. 409, Capital Gains and Losses](https://www.irs.gov/taxtopics/tc409).”
>     
> 4.  Internal Revenue Service. “[Rev. Proc. 2023-34](https://www.irs.gov/pub/irs-drop/rp-23-34.pdf),” Pages 5–7.
>     
> 5.  Internal Revenue Service. “[Rev. Proc. 2024-40](https://www.irs.gov/pub/irs-drop/rp-24-40.pdf),” Pages 5–7.
>     
> 6.  Internal Revenue Service. “[Credits and Deductions for Individuals](https://www.irs.gov/credits-deductions-for-individuals).”
>     
> 7.  Target Corp. “[2023 Annual Report: Form 10-K](https://corporate.target.com/getmedia/0817b557-7676-440b-a85d-3f48954ff919/2022-Target-Annual-Report.pdf),” Page 40 (Page 46 of PDF).
>     
> 8.  Congress.gov, U.S. Congress. “[H.R.2—Jobs and Growth Tax Relief Reconciliation Act of 2003: Summary](https://www.congress.gov/bill/108th-congress/house-bill/2?q=%7B%22search%22%3A%5B%22cite%3APL108-27%22%5D%7D&s=1&r=1).”
>     
> 9.  Congress.gov, U.S. Congress. “[H.R.1—An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018: Text](https://www.congress.gov/bill/115th-congress/house-bill/1/text).”
>     
> 10.  Internal Revenue Service. “[Rental Income and Expenses—Real Estate Tax Tips](https://www.irs.gov/businesses/small-businesses-self-employed/rental-income-and-expenses-real-estate-tax-tips).”
>      
> 11.  Internal Revenue Service. “[Topic No. 403, Interest Received](https://www.irs.gov/taxtopics/tc403).”