Lesson 4
Income - Part 1
Earned vs Unearned
Section D
VITA/TCE
TRAINING 101
In this presentation we will cover:
Remember: You do not have to memorize anything– you will have your PUB 4012 and a team to assist you if you have questions.
There are 2 types of income:
Earned Income
You earn it, you work for it!
Comes from working either as an employee or working for yourself.
Unearned Income
Called Passive Income
Comes from investments, benefits, or other sources that don’t require active work. (ex: Rental income, Interest, Dividends, Unemployment, Retirement, Social Security, etc.)
Earned Income vs. Unearned Income
Why it Matters Credits such as the Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC) require earned income. Credits are discussed later in Lessons 13-18
Earned Income
Earned Income
Employee- W2 Earnings
Earned Income- W2’s
Employees of a company, have their Wages, Salaries, and Tips reported on W-2s.
Volunteer Note:
Not every W2 looks the same
FYI: Why might Box 1 be less than Box 3 and 5?
Certain benefits reduce taxable federal wages but are still subject to Social Security and Medicare tax.
Common examples include:
W-2s Report:
Earned Income- W2’s
Earned Income- W2’s
Boxes 7-12 may report:
Earned Income- W2’s Box 12
Common Box 12 Codes:
New codes!
More on the Overtime & Tip Deduction will be included in Lesson 12B – Additional Deductions
More on Trump Accounts will be included in its own Lesson
Earned Income- W2’s Box 14
Box 14a is an "Other Information" box. Employers use it to report payroll deductions and items that don't fit elsewhere on the W-2. There is no standard IRS code list, so descriptions vary by employer.
Things to watch for:
Earned Income- W2’s Box 14
Volunteer Note regarding Paid Family Medical Leave (PFML) Premiums:
Note: If the taxpayer itemizes, the amount may be included with other deductible state and local taxes, subject to applicable limits.
Important: If Box 14 shows a PFML, Ask: "Did you receive any state-paid family leave benefits during the year?"
If they said yes, Ask: "Did you receive a Form 1099-G?“ – you need this form– the PFML Benefit is Taxable Income.
Review Form 1099-G for the new Box 10, Family Leave Benefits. The amount is generally taxable and should be reported on the federal return
Note: Florida does not have a state income tax.
Before you start the return, make sure to always review this section—if there is State income reported, get with your Site Coordinator-make sure this is a return your site can do.
W-2 forms also report State-level wages and earnings and State income tax withheld (if applicable). Some also report Local taxes.
Earned Income- W2’s continued
Box 12 Codes
A little about TP & TT
Code TP --Reduced Tax on Qualified Tips TY2025-TY2028
W2 Tip Income can be reported on:
and Box 12 Code TP
NOTE--Only Tip income reported by the employer in Box 12 with code TP can be claimed for the Tip Deduction.
More on the Tip Deduction will be included in Lesson 12B – Additional Deductions
Box 14b – Occupational Code reported by employer (reports to the IRS what type of qualified work was performed to receive the tips listed in Box 12 Code TP).
Box 7, Social Security Tips
Great News!! Automatic Calculation! TaxSlayer reads the Code TP value and factors it into your federal tip deduction limits automatically without needing a separate manual calculation. Just input the W2 exactly how you see it.
!!!! IMPORTANT !!! Starting with 2026 tax year filing, if tip income is not reported in Box 12 with Code TP or the taxpayer thinks the amount is wrong, they must obtain a corrected W-2 (Form W-2c) from their employer using Code TP.
NEW--Reduced Tax on Overtime Pay TY2025-TY2028
More on the Overtime Deduction will be included in Lesson 12B – Additional Deductions
TT $2,560.24
!!!! IMPORTANT !!!
For 2026 tax year filing, if overtime is NOT reported on the W2, the taxpayer must obtain a corrected W-2 (Form W-2c) from their employer using Code TT. Paystubs cannot be used. (Also Form 4852 cannot be used to claim this deduction if the overtime is missing or understated. A corrected Form W-2c is required.)
Form W2-C
Corrected W2
Remember: you need to enter the codes and income exactly as you see it on the W2. If the form has an error, you need to send the taxpayer back to the employer to get a corrected copy.
YOU MUST HAVE BOTH THE ORIGINAL W-2 AND THE CORRECTED FORM W-2C
W2-C Corrected W2
Enter the entire original W2 completely and then update this box only
Original W2
Corrected W2 W-2C
W-2C ONLY reports what has changed—You need the original form too!
This W-2C is reporting a change to Box 2 ONLY– tax amount withheld.
Earned Income
Self-employment
Lesson 7 covers entering Self-employment income and expenses and what is allowed
Earned Income – Self-employment
Note-- Farm income is Out of Scope for VITA
Self-employed means you work for yourself instead of being employed by someone else.
Examples of Some Types of Self-Employment:
Earned Income – Self Employment Tax Forms -1099-NEC
Earned Income –1099-NEC Tips & Overtime
New reporting fields:
These amounts may be used to determine eligibility for new tip and overtime deductions.
Enter all amounts exactly as shown on the form.
More on the Tip & Overtime Deductions in Lesson 12B – Additional Deductions
FYI- The amounts in Box 1b and 1d ARE included in 1a.
Box 1a indicates the total amount of compensation received.
Earned Income – Self Employment Tax Forms -1099-K
1099-K will be issued when:
1. There are more than $20,000 in payments for goods or services
2.AND there are MORE than 200 transactions
Note--–most of our taxpayers will NOT meet these thresholds, so they will not receive this form.
Issued when someone receives payments through third-party networks or payment processors like:
PayPal Venmo (for business transactions) Cash App (business use)
Stripe Square Online marketplaces (e.g., eBay, Etsy, Amazon)
Important: Taxpayers are obligated to report all income
even if they do not receive a tax form.—
Always ask if they other income not reported on any form!!
Earned Income – Self Employment Tax Forms -1099-K
Tips listed in Box 1c are included in Box 1a.
�Box 1c helps flag taxpayers who may qualify for the new tips deduction.
More on the Tip & Overtime Deductions in Lesson 12B – Additional Deductions
Earned Income – Self-employed Responsibilities
Track All Income- Self-employed individuals must keep accurate records of every dollar earned from all sources.
Track Business Expenses- Important to document all expenses related to earning that income — like supplies, travel, or advertising.
Why It Matters: This information is used to calculate net profit
and determine how much tax is owed.
No Employer = More Responsibility
They must handle their own recordkeeping and tax reporting.
How? With Logs, Spreadsheets, notebooks, apps, bank statements, etc . Whatever method works best for them.
More on Self-employment income Lesson 7
Unearned Income
Types of Income- Unearned Income
Can be income produced by investments like:
Stocks/
bonds
Interest
Dividends
Sale of property-Note only sale of Main Home is within Scope for VITA—all other property is Out of Scope
Crypto Income is Out of Scope
Types of Income: Unearned Income Cont.,
Income from unemployment
Income from Retirement Plans
Social Security
Note: Unearned income is money you receive without working for it currently, even if it’s based on past work like those shown above.
Frequently Asked:
See PUB 4012 page D-1
See Page D-1
For complete list
Some Other Types of Less Common Unearned Income Include:
Intake Form
Page 2-Income
(Showing 2025 Intake Form)
x
x
Rental of Home- Less that 15 days (14 or less)-not taxable-don’t report
*There are exceptions—see notes in red above
Rental of Home-15 or more days- Out of Scope;
If renting because Deployed as Active-duty military – someone Military Certified (M) Can Help
Form shows the Minimum Required Certification Level
B=Basic; A=Requires Advanced Certification; M=Requires Military Certification
Income on the 1040
All Income is reported in this section of the 1040. The most common types can be found on Lines 1-6.
Other types of income flows to Schedule 1 and then to the 1040 Line 8
Get to Know Your Tools!!!
PUB 4012
Section D-Income
You do not need to memorize this–
In case you want to know what income is subject to income tax and what is not ☺
Get to Know Your Tools!!!
PUB 4012
Section O –Navigating Taxslayer
Great Resource– add a Post-it to your book!!
Entering Income in Taxslayer
Watch Video to See How, then Do it Yourself!
There are other videos that cover scenarios regarding:
Click Image to See video
WOO-HOO!!!
You Did it!
Next: Practice Scenario
The Flinstones-Part 1