What is Active Income?
What is the difference between active income and passive income?
What should you know?
In this article, we will break down the meaning of Active Income so you know all there is to know about it!
Keep reading as we have gathered exactly the information that you need!
Let’s dig into our money and income knowledge!
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What Is Active Income
Active income is a type of income that is earned by a person by actively doing some work, rendering services, or performing activities in exchange for compensation.
The most notable form of active income for individuals is a salary earned by performing work for an employer.
You can consider salaries, wages, commissions, or tips as different types of active income a person may earn.
Companies and self-employed individuals can also earn an active income.
Generally, for a company’s income to be considered “active”, the income must be generated through the material participation of the company.
In the United States, the IRS looks at various factors in determining if there is active income earned by looking at if the taxpayer put at least 500 hours in the business or was the work mainly done by the taxpayer, among other things.
In essence, for “income” to be “active”, it must be earned by the person or company through its real active participation.
Active Income Definition
According to Investopedia, here is how they define active income:
Active income refers to income received for performing a service.
As you can see from this simple definition, active income is characterized as follows:
- It’s a type of income
- Received by a person or company
- For rendering a service or generated by material participation
Fundrise offers the following active income definition:
Active income is income earned as a direct result of a specific effort. In other words, input is correlated to output.
Types of Income
There are many types of income a person or a company can earn, namely:
- Active income
- Passive income
- Portfolio income
Active income is a type of income that you generate by doing some work or participating in the generation of the income in a material way.
On the other hand, passive income is when you do not necessarily participate in a material way in generating the income.
For example, you can earn passive income by starting a blog, investing in dividend stocks, or purchasing a rental revenue property.
The reason why the income is passive is that you are generating the income without your active or material participation (although you need to put in some work, the effort is not material).
Portfolio income is income you earn from investments, such as:
- Dividend income
- Interest income
- Capital gains
As such, active income is one type of income that is generated through active work.
You perform services and you get paid, that’s income earned actively.
For example, you can generate an income actively by rendering the following services:
- Working a day job
- Consulting services
- Coaching services
- Working in a call center
- Acting as a sales person
- Building websites
- Doing graphic design
- Doing SEO consulting
- Acting as a real estate agent
- Working as a stock trader
Active Income vs Passive Income
What is the difference between active income and passive income?
Let’s break this down.
“Active income” is any type of income that you can earn by rendering service, putting in the hours, and materially participating in a business.
In other words, the work you put in translates into the income you generate.
The best example of active income is an employee earning a salary by providing a set number of hours of work per week.
The input (hours) translates directly into an output (income).
“Passive income” is a type of income that you earn without a person’s active involvement.
For instance, when you earn an income from a rental property or a business as a silent partner, you are passively earning an income.
With passive income, there’s little input of your time and there’s an output of money.
Passive income is a topic that I’m passionate about and I provide my audience and readers content on how they can create wealth through passive income.
Since passive income does not require significant participation of the income-earner, you can create multiple streams of passive income for yourself and scale tremendously.
Active Income Examples
To better illustrate the concept, it’s worth looking at some examples of active income.
Let’s say that John and Mary are partners in a business operating online e-commerce shops, blogs, and affiliate marketing.
In this case, Mary is the one who handles most of the work, does most of the writing, manages the e-commerce, and so on.
John, on the other hand, spends a few hours a week (less than 100 hours in a year) to make sure the websites are operating well, handles some development work, and checks in with Mary from time to time.
In this example, Mary will be considered to earn an active income (from the IRS perspective of course) and John passive income.
Based on the material participation rule, a person who is putting in more than 500 hours a year and has material participation will be considered to earn an active income.
Let’s now look at a few types of active income examples.
A salary is what you get when you work for someone.
In other words, you agree to trade your time for a certain period of time (typically a year) in exchange for a set amount of money (your salary).
For example, a person can be hired as a business blogger earning $75,000 per year.
In this case, the person will work for an employer for an entire year providing the employer with skilled blogging work in exchange for $75,000.
Hourly wages are another type of active income where you are trading an hour of your time in exchange for a specific amount of money.
For example, if you work for someone at $25 per hour, you are effectively getting an hourly wage.
If you put in 10 hours at $25 per hour, you’ll earn $250.
Those who are in sales can earn a commission whenever they make a sale.
For example, a car dealer who sells a brand new car may be entitled to receive a commission for the sale.
The more cars the person sells, the more commission he or she will end up getting.
You can make an active income by generating tips.
There are many jobs out there where the employee or worker can earn a significant amount of tips by performing active services.
The most notable example is a waiter or waitress earning tips in a restaurant.
Another example of active income is to make money by providing consulting services or acting as a freelancer.
A person who is able to find clients willing to pay him or her for their skills, expertise, and knowledge can earn a significant amount of active income by rendering consulting services.
For example, I am a professional blogger where I have a background in law and finance.
I have extensive experience in blogging, building websites, finance, and making money online.
If someone would want to get advice from me on how to make money online, I can provide consulting services to get them started.
That would represent an active income to me.
Making Money Passively
If you are looking to make money passively, in a constant and steady fashion, be sure to check out my blog dedicated to this topic.
My blog does not provide you with schemes to get rich fast or sell you with only a dream.
On this blog, I cover real, actionable, and concrete ways you can start making money.
My passion and focus is the process of generating passive income as that’s a type of income that you can generate consistent and with minimal effort.
This does not mean that you must not work hard in earning passive income, it just means that once you put in the time, energy, and capital to set up your passive income source, keeping the money flowing will not require as much heavy lifting.
If my proposition interests you, be sure you check out my passive income ideas, and other topics I write about such as passive income making money through stock investments, real estate, and others.
“Active Income” Takeaways
So, how do you define Active Income?
What are different examples of active income?
How does active income differ from passive income?
In this article, we’ve broken down the notion of active income so you know all about it.
Let’s look at a summary of our findings.
Define Active Income
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