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Taxable vs. Nontaxable income

March 10, 2015

Even though taxpayers are aware that most types of income are taxable, there are certain areas, such as royalties, bartering, and fringe benefits that raise confusion at tax time. The general rule is that any income that you need to include in your tax return is taxable unless it is considered exempt. Income that is nontaxable may also need to be included in your return, but you may not have to pay taxes on it.

If you are an employee, any income that you receive for your services, including wages, salaries, commissions, tips, and fringe benefits are taxable. If you are self-employed, you need to pay taxes on the income you receive for your services on Form 1040 Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business. If you control the time, place and the manner in which you do your work, then you are likely self-employed.

Any fringe benefits that you receive as part of your services, such as bonuses, cell phone coverage, insurance premiums, anything your employer pays in the form of compensation, must be included with your income for tax purposes.

If you rent out your house, a part of your house, equipment or vehicles, you need to determine whether this activity is a business or not. For tax purposes, if your primary purpose for renting is to make a profit or to earn income, then the activity is considered a business.

Any payment received in royalties is taxable as ordinary income. This includes royalties from copyrights and patents. For bartering, you need to report in your tax return the fair market value of the services or property that you received in bartering.

All income must be reported on your tax return, or the IRS may conduct an audit to determine your full tax liability. The IRS receives information from third-party sources, including employers, about a taxpayer’s income. Discrepancies in the information the IRS receives from other sources can quickly lead to an audit. For further information on taxable and nontaxable income, taxpayers can use this IRS resource.


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