The IRS defines “earned income” as the compensation you receive from employment and self-employment. Specifically excluded from this definition is any unemployment compensation you receive from your state.
In general, in 2020 the first $1,100 worth of a child's unearned income is tax-free. The next $1,100 is taxed at the child's income tax rate for 2020. Anything above $2,200, however, is taxed at the marginal tax rate of the parent(s), which usually is higher than the child's rate. This tax treatment has gained a nickname: the "kiddie tax."
The Kiddie Tax applies to all children who are 18 years of age or under—or dependent full-time students under 23. The kiddie tax applies to most unearned income that a child receives and does not apply to any salary or wages.
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