Active Income
Active income is any income earned through the performance of services that are related to the owner’s own skills, efforts, and knowledge. It is income that is generated from sources that require the use of the owner’s personal abilities, rather than from the ownership or sale of assets.
Examples of Active Income:
- Salary from employment
- Wages as a freelancer
- Business income from services provided
- Rental income from property that is actively managed
Key Characteristics of Active Income:
- Related to the owner’s own skills, efforts, and knowledge: The income is generated from activities that require the owner’s direct involvement and participation.
- Not derived from the ownership or sale of assets: It is not income that is earned from the ownership or sale of assets, such as investments or real estate.
- Subject to personal exertion: The income is typically subject to the owner’s personal exertion and control.
- Fluctuates with effort: The income can fluctuate based on the owner’s effort and the amount of time they spend on the activity.
Examples of Passive Income:
- Dividends from stocks
- Interest from savings accounts
- Royalties from writing or music
- Rental income from property that is not actively managed
Note: Passive income is not considered active income for tax purposes.
Additional Examples:
- A musician earns income from performing music.
- A teacher earns income from providing education services.
- A contractor earns income from providing construction services.
- A software engineer earns income from developing software.
In summary, active income is income earned through the performance of services that require the owner’s own skills, efforts, and knowledge.
FAQs
What is active income vs passive income?
Active income is money earned through direct effort, such as a salary or wages. Passive income is earned with little to no ongoing effort, like rental income or dividends.
What is better, passive or active income?
It depends on your goals. Active income is more immediate but requires continuous effort, while passive income provides long-term earnings with less work.
What is an example of active and passive income?
Active income example: A full-time job. Passive income example: Earnings from rental properties.
Is pension a passive income?
Yes, a pension is considered passive income because it requires no active work once it’s set up.
