What Are the 7 Streams of Income?

Financial inflows that fuel personal and household budgets often originate from diverse sources, commonly referred to as income streams. Understanding how these streams function contributes to overall financial well-being. This exploration examines common categories of financial inflow.

Understanding Income Streams

An income stream represents any source from which an individual or entity receives money. These streams provide consistent or intermittent financial inflows, often from different activities or assets. The concept emphasizes diversifying financial sources, moving beyond reliance on a single form of income.

Some income streams require direct, ongoing effort, termed active income. Others, once established, produce revenue with less continuous input, referred to as passive income. Cultivating multiple income streams creates distinct pathways for money, fostering resilience and opportunity.

The Seven Common Income Streams

Earned Income

Earned income is money acquired directly from labor or services performed, including wages, salaries, tips, and commissions from an employer. It also encompasses net earnings from self-employment, such as freelancing or consulting. This income is reported on Form W-2 for employees or Schedule C for self-employed individuals, and is subject to federal income and payroll taxes.

Profit Income (Business Income)

Profit income, or business income, is money generated from owning and operating a business. It represents net revenue after all business expenses are deducted from gross sales. Sole proprietors report this income and expenses on Schedule C. This income is subject to personal income tax rates and self-employment taxes.

Interest Income

Interest income is revenue earned from lending money or from funds held in interest-bearing accounts or investments. Common sources include savings accounts, certificates of deposit (CDs), and bonds. It is typically reported on Form 1099-INT. While most interest income is taxable at ordinary rates, certain types, like municipal bond interest, may be tax-exempt.

Dividend Income

Dividend income consists of payments received from owning shares in a company or mutual fund. These payments represent a portion of a company’s profits distributed to shareholders. Dividends are categorized as either ordinary or qualified, with different tax treatments. Ordinary dividends are taxed at regular income rates, while qualified dividends, meeting specific IRS criteria, are taxed at lower long-term capital gains rates (0%, 15%, or 20% depending on income). This income is reported on Form 1099-DIV.

Rental Income

Rental income is the money earned from leasing out property or assets, such as residential homes, commercial spaces, or even equipment. This includes not only regular rent payments but also advance rent and payments for canceling a lease. Property owners report rental income and related deductible expenses, such as mortgage interest, property taxes, insurance, and depreciation, on Schedule E (Form 1040). Generally, rental income is not subject to payroll taxes, distinguishing it from earned income.

Capital Gains

Capital gains refer to the profit realized from selling an asset for more than its original purchase price. These assets can include stocks, bonds, real estate, or other personal property. Capital gains are classified as either short-term or long-term based on the asset’s holding period. Short-term gains, from assets held for one year or less, are taxed at ordinary income rates, while long-term gains, from assets held for more than one year, typically receive preferential tax rates (0%, 15%, or 20%). These gains are reported on Form 8949 and Schedule D (Form 1040).

Royalty/Licensing Income

Royalty or licensing income is money received for the use of intellectual property or natural resources. This stream typically arises from granting permission to others to use copyrighted works (like books, music, or films), patented inventions, trademarks, or to extract minerals. Royalty payments are often a percentage of sales or a set fee, and they can provide a continuous revenue stream to the owner of the intellectual property. This income is generally reported on Form 1099-MISC and taxed as ordinary income.