You’ve just entered the world of work and are earning your first income. Or your business is starting to earn an income. What does having an income entail and what are the different types? Read further to find out all you need to know about earning and income.
What are income and earnings?
Income is the amount of money you as an individual or as an organization earn through providing services, selling goods as a business or invest. When you become an employee for a company, you earn wages for the work you do. As a business, income is the amount of money remaining after all expenses and taxes are paid, known as net income. It is also called the bottom line as it sits at the bottom of an income statement. This is different to revenue, which is the total amount of income before deducting expenses, also called the top line.
Earnings are what remains after taxes, expenses and interest are deducted. These are what you or a company earns as a profit. Earnings can show whether a business is profitable and actually making money after expenses and taxes. This figure is also listed as net income on income statements.
Any type of income is taxable with its own specific regulations. The types of income are as follows;
- Earned Income: Earned from employment, which are wages, salaries, tips, commissions and net income from self-employment. Earned income can also include disability and union strike benefits or payments from some retirement compensation.
- Profit Income: Profit is the revenue after expenses, costs and taxes have been deducted.
- Interest Income: This is income earned through money that is put away as an investment or into savings, where interest accumulates overtime on principal amounts.
- Dividend Income: This income is the distribution of property or shares to shareholders. This could be in cash or stocks and is usually the distribution of taxable income to a company’s investors.
- Rental Income: Income earned through renting properties out.
- Capital Gains: These are increases in a capital asset’s value that is added to its overall value once sold.
- Royalty Income: This income is earned by allowing another entity to use your property, patent, copyright, resources or franchise etc.
Important terms to know
There are multiple ways to earn money, and with that comes a few terms you need to understand.
Firstly, what is profit? As stated above, profit is the total revenue minus the total expenses, which includes taxes and interest. Profit tells us how profitable and successful a business is or how a company is performing. It’s broken into gross profit, operating profit, and net profit, which each gives a particular type of information.
Gross profit is the sales minus the cost of goods/services sold. On an income statement, sales are on the first line, while the cost of goods sold (COGS) are listed below it. You can easily calculate your gross profit by using this formula Gross Profit = Total Sales − COGs
Operating profit is calculated by deducting operating expenses from the gross profit. These expenses are, for example, general administrative costs. Net profit is the income remaining after all expenses, plus taxes and interest, have been paid and deducted.
The formula to calculate Operating Profit is: Operating Profit = Gross Profit − Operating Expenses
The formula to calculate Net Profit is: Net Profit = Operating Profit − Taxes & Interest
On the other hand, as an individual, you can earn net income. Net income is incoming income from employment, business, investments, benefits and grants. Then any taxes are deducted from your income, leaving you with your net income. Everyone who earns an income above a certain amount until the age of 65, needs to pay income tax.
Why income protection is important
If you’re unable to work due to serious illness or temporary injury, you and your family could suffer financial strain due to income loss. It could become difficult to provide for your family if you are unable to earn an income. Income protection allows you to earn enough to help you maintain your lifestyle and take care of your family. This is usually a percentage of your regular income.
RCS offers comprehensive income protection and benefits.
- Death - R5,000 per month for 6 months to the Insured's nominated beneficiary as a lump sum
- Hospital Daily benefit - R400 for each consecutive 24 hour period directly to the insured up to a maximum of 30 days per calendar year
- Payment Options - Conveniently charged to your RCS Card or pay via debit order
- Rate - R49 per month
The RCS Income Protection Plan will help you get back on your feet and ensure you do not carry unnecessary financial strain while you are recovering. Read more on our Freelancing and income protection plan.
Read more about key concepts of financial education, and be prepared for the world of finance.