When people say income, they usually mean money you earn. But it matters how you earn it. Different types of income come from different activities, follow different rules, and grow at different speeds. Broadly, there are four types to learn before you start your first job or head to college: salary income, business income, investment income, and rental income.
Salary income is money you earn by trading your time and skills to an employer. You might be paid hourly at a part-time job or get a set yearly amount called a salary. In social studies terms, this is income from labor. It tends to be steady and predictable, but you only get paid when you work.
Business income comes from running your own activity that sells goods or services, like tutoring, lawn care, editing videos, or an online shop. This is entrepreneurship. You earn the difference between your revenue and your costs. It can grow faster than a job if you scale it, but it is less predictable and includes risks and responsibilities.
Investment income is money your money earns. Common examples include interest from savings, dividends from stocks, and capital gains when you sell an investment for more than you paid. In economics, this is income from capital. Investment income can compound over time, meaning earnings can themselves earn more.
Rental income is money from letting others use property, often housing. You might hear about landlords, house hacking in college, or renting out a parking spot. Rental income blends elements of business and investment: you own an asset and also operate a mini-business to collect rent and pay expenses.
Understanding income types helps you make smarter choices with your time and energy. For example, an hourly job can help you build a steady schedule and a resume, while a small business could earn more per hour but require marketing, bookkeeping, and risk-taking. Investments tend to start small but can grow with patience. Rentals usually require more money and responsibility but can create long-term cash flow.
It also matters for taxes and planning. Salary income usually has taxes withheld from your paycheck automatically. Business income requires you to set aside money for taxes yourself. Investment and rental income may be taxed differently than salary, which affects how much you keep. This is crucial when budgeting for college, estimating living expenses, or deciding how much you can save for future goals.
Finally, knowing these types ties into the circular flow of the economy. Households supply labor to firms and receive wages. Households also supply capital to firms by investing and receive dividends and interest. Entrepreneurs organize resources to create goods and services. Recognizing where your money comes from helps you see your place in the broader economy.
Here are simple, step-by-step ways to calculate each income type.
Assume you work 12 hours per week at 15 dollars per hour during the school year, and 25 hours per week during summer.
If you work 36 school weeks and 12 summer weeks:
Taxes and payroll deductions reduce gross pay to net pay (what hits your bank account). A quick estimate for a high-school worker might include federal income tax, state income tax, and payroll taxes for Social Security and Medicare.
Approximate payroll taxes: 7.65 percent of gross pay. Assume 5 percent state income tax and 10 percent federal income tax for a quick estimate, knowing your actual number depends on your W-4 and deductions.
Business income is profit: revenue minus expenses. If you are a sole proprietor, you also pay self-employment tax, which is roughly 15.3 percent on net earnings for Social Security and Medicare.
Self-employment tax estimate:
Self-employment tax ≈ 0.153 × 0.9235 × profitThe 0.9235 factor adjusts for the employer portion. Using the formula:
You may also owe income tax on the profit. Always save receipts and track every cost.
Compounding happens when you reinvest earnings so they earn too.
Future value = Principal × (1 + r)^{n}If you invest 1,000 at 7 percent for 5 years, compounded annually:
Future value = 1,000 × (1 + 0.07)^{5} ≈ 1,000 × 1.4026 ≈ 1,402.60Rental income is rent minus expenses. Common expenses: property taxes, insurance, repairs, property management, utilities you cover, and mortgage payments. Investors often start with cash flow and net operating income.
Gross rent − vacancy allowance − operating expenses = Net Operating Income (NOI) Cash flow = NOI − mortgage paymentExample: Monthly rent is 1,200. Assume a 5 percent vacancy allowance (60), monthly operating expenses of 300, and a monthly mortgage payment of 700.
Note: Real rental analysis also includes depreciation for taxes and long-term repairs. For a first look, the above gives a simple cash flow estimate.
Meet Jordan, a high school senior planning to study nursing. Jordan wants to pay for textbooks, save for college, and start investing at age 18.
Jordan works at a grocery store for 15 per hour, 15 hours per week, for 40 weeks.
Jordan plans a simple budget: 50 percent for current expenses, 30 percent for college savings, 20 percent for investing.
Jordan starts a weekend tutoring service charging 25 per hour, 4 hours per week for 20 weeks.
At age 18, Jordan opens a Roth IRA using earned income from the job and tutoring. A Roth IRA lets contributions grow tax-free, and withdrawals in retirement are typically tax-free if rules are met.
Jordan contributes 1,000. If Jordan earns a 7 percent average annual return for 40 years:
Future value ≈ 1,000 × (1 + 0.07)^{40} ≈ 1,000 × 14.974 ≈ 14,974If Jordan contributes 1,000 each year for 10 years and then stops, letting it grow for 30 more years at 7 percent, the early start matters a lot.
Future value of yearly contributions = contribution × ((1 + r)^{n} − 1) ÷ rFor the first 10 years of contributions:
FV at year 10 ≈ 1,000 × ((1.07^{10} − 1) ÷ 0.07) ≈ 1,000 × 13.816 ≈ 13,816Then that amount grows for 30 more years:
Final FV ≈ 13,816 × 1.07^{30} ≈ 13,816 × 7.612 ≈ 105,200This shows the power of compounding when you start early.
Jordan does not own property yet, but plans for the future. In college, Jordan considers house hacking later by renting a room to a roommate to offset rent.
Example: Monthly rent is 1,000 for a two-bedroom apartment split with a roommate who pays 600 for their room. Your share is 400. While this is not rental income you own, it shows how housing choices can reduce costs, freeing up money to invest.
Salary: Money paid by an employer in exchange for your time and skills, either hourly or as a yearly amount.
W-2: A tax form employers send that reports your annual wages and taxes withheld.
1099: A tax form for non-employee income, such as from freelancing or gig work.
Gross pay: Your pay before any taxes or deductions.
Net pay: Your take-home pay after taxes and deductions.
Self-employment tax: Payroll taxes for Social Security and Medicare paid by self-employed people, roughly 15.3 percent of net earnings.
Revenue: Total money collected from selling goods or services before expenses.
Profit: Money left after subtracting all business costs from revenue.
Roth IRA: A retirement account funded with after-tax money; growth and qualified withdrawals are tax-free.
Brokerage account: An account for buying and selling investments like stocks, ETFs, and bonds.
Dividend: A payment companies may make to shareholders, usually from profits.
Capital gain: Profit when an investment is sold for more than it cost.
Compound interest: Earnings that themselves generate earnings over time.
Rental income: Money collected from tenants for the use of property.
Net Operating Income (NOI): Rental income after vacancy and operating expenses, before mortgage payments.
Cash flow: Money left after all expenses and debt payments.
Opportunity cost: What you give up when you choose one option over another.
Entrepreneur: Someone who organizes and operates a business and takes on risk.
FICA: Federal Insurance Contributions Act; payroll taxes for Social Security and Medicare.
529 plan: A tax-advantaged education savings plan for qualified expenses.