What Is Income Earned From Work for FAFSA?

The Free Application for Federal Student Aid (FAFSA) is key to accessing financial assistance for higher education. Accurate completion of this form is essential for students and their families seeking federal grants, scholarships, work-study programs, and loans. Reporting “income earned from work” is a significant component of the FAFSA, directly influencing aid eligibility. Understanding what constitutes this specific income category and how it is reported streamlines the application process and helps ensure a correct assessment of financial need.

What Counts as Income Earned From Work

Income earned from work, for FAFSA purposes, refers to money received from employment or active participation in a trade or business. This includes compensation for services, such as wages, salaries, tips, commissions, and bonuses. These amounts are typically reported on a W-2 form provided by an employer.

For individuals who are self-employed, income earned from work is defined as the net earnings from a business or farm. This “net” amount is calculated after deducting allowable business expenses from gross receipts, and it is usually reported on IRS Schedule C. It is important to report the net profit, not the total revenue, as overstating income can negatively impact aid eligibility.

Military basic pay is also considered income earned from work. While certain types of combat pay may be excluded from federal gross income, they are still considered for federal student aid eligibility and should be included in the earned income figures on the FAFSA. Untaxed combat pay reported in Box 12, Code Q of a W-2 is factored into financial aid calculations.

How to Report Earned Income on FAFSA

Reporting earned income on the FAFSA utilizes information from federal tax documents. The FAFSA requests income information from the “prior-prior year,” meaning for the 2025-2026 FAFSA, 2023 tax information is used. This income data is found on IRS Form 1040 and its accompanying schedules.

The IRS Data Retrieval Tool (DRT) is the most accurate method for transferring tax information to the FAFSA. This tool allows applicants and their parents to securely transfer federal income tax return data directly from the IRS into the FAFSA form, minimizing errors and reducing the need for verification. When the DRT is used, the transferred tax information is often hidden for security reasons, displaying “Transferred from the IRS” in the relevant fields.

If the DRT cannot be used, or if manual entry is required, earned income figures can be obtained from specific lines on tax forms. For the 2023 tax year, income earned from work can be found by combining Line 1z from IRS Form 1040 with Lines 3 and 6 from Schedule 1. Net profit or loss from self-employment, reported on Schedule C, Line 31, is also a required entry. Ensure self-employment income is not double-counted, as the FAFSA accounts for this in its calculations.

Understanding the Difference Between Earned and Unearned Income

For FAFSA reporting, it is important to distinguish between earned income and unearned income, as both are reported but categorized differently. Earned income originates from active work or business activities, including wages, salaries, and net self-employment earnings. This income reflects direct compensation for labor or services.

Unearned income, in contrast, is derived from sources other than employment or active participation in a business. Examples include interest income from savings accounts or investments, dividend income from stocks, and capital gains from the sale of assets. Other common forms of unearned income include unemployment benefits, Social Security benefits, and child support received.

While both earned and unearned income contribute to a family’s overall financial picture on the FAFSA, they are assessed differently in the financial aid calculation. Untaxed Social Security benefits are generally not counted as income for FAFSA purposes. Unemployment benefits are typically considered.

How Earned Income Affects Financial Aid

Earned income plays a central role in determining a student’s eligibility for federal financial aid. The FAFSA uses reported income, along with assets and other demographic information, to calculate the Student Aid Index (SAI), formerly known as the Expected Family Contribution (EFC). The SAI represents the amount a student and their family are expected to contribute towards the cost of education for an academic year.

A higher amount of earned income results in a higher SAI. This is because the FAFSA formula assesses income as a primary indicator of a family’s ability to pay for college expenses. Income is assessed at a higher rate than assets in the financial aid formula, with parental income being the most weighted component for dependent students.

While there is no maximum income limit to file the FAFSA, the amount of financial aid awarded is directly influenced by the SAI. A higher SAI reduces the amount of need-based financial aid a student may receive, as it indicates a greater capacity to cover educational costs. The formula includes allowances for taxes and basic living expenses, which are subtracted from total income to arrive at an “available income” figure that is then assessed.