Which type of income is classified as "Compensation"?

Compensation refers to the payment received by an employee from their employer in return for services rendered. Severance pay is a type of income that is categorized as compensation because it is a payment made to an employee upon termination of employment. This can occur due to layoffs, company downsizing, or other reasons that lead to the end of the employment relationship.

Severance pay is typically based on the employee's length of service and is considered wages for tax purposes, subject to income tax and payroll tax withholding. This distinguishes it from other types of income in the choices provided, which do not fit the definition of compensation from employment. Rental income, stock dividends, and capital gains represent different categories of income, such as investment income or passive income, rather than payments for services rendered.