Active Vs. Passive Income - What is the Difference? (2024)

What is your lifestyle? If you’re like most, your lifestyle expenses may include a home, vehicle, significant other, children, and entertainment activities. Cell phones, spa days, clothing, home décor, and bling for your car are a few extras that help you love your lifestyle.

What do all of these have in common? They require you to purchase them with money. Where do most people get their money? At work.

The type of work you choose can determine the type of income you earn, which can determine the type of lifestyle you can lead. The most common types of ways to earn income are actively or passively.

Active income is any source of income where you work for the money (i.e. hourly work, salary, side hustles).

Passive income is income generated on auto-pilot without any active involvement (i.e. dividends, investments, rental income, online businesses, etc.).

In this guide, we are pitting the two against each other: active income vs. passive income. We will look at both active income streams and passive income streams to determine the pros and cons of each of them.

Let’s get to know active income first.

What Is Active Income?

You have a job. You go to work for an employer. While at work you perform duties that help your employer be successful. Whether you work in the human resources department, freelancer, consultant, the front lines, or as an executive, your job is essential for making the employer successful.

Earning active income means you are trading work time for money. You give them your service and time; they give you money and sometimes benefits. This may be a full-time job, part-time-job, or side hustle. Either way, you are earning an hourly wage or salary in exchange for your time.

Right now, there are over 131 million full-time employees in America earning active income. According to the Census report, 13 million of these workers have more than one job. Statistics show over 27 million people work part-time jobs, or less than 35 hours each week.

One thing is for sure, Americans are working their tails off. But what are they doing?

Most Common Active Income Jobs

Just like Americans like to work, we also like to spend our money. By doing so, we are keeping retail salespeople and clerks employed. So, the next time we get annoyed by that salesperson trying to get you to buy a product in their store, just remember they are only doing their job.

Other common examples of active income jobs include restaurant or food workers, including the preparers, servers, caterers, and clerks. Registered nurses, customer service representatives, factory workers and laborers, secretaries, and general managers are also considered active income.

Higher paying active income jobs include directors, chief executive officers, doctors, lawyers, and company leaders.

Most traditional job opportunities are active income streams. The commonality between all of these jobs is that they require active effort. If you are not actively involved, you are not making money.

This isn’t necessarily a bad thing. Most individuals have some active source of income, many of which are flexible and fulfilling.

If you don’t like to wake up before you want to, change out of your comfy clothes into business apparel, and drive to a location where you will spend most of your waking hours, you can choose to make your active income online, from home.

Earning Active Online Income

That’s right. You can make an active income from your sofa. The same principle applies, though. You must get up, show up, and do the tasks of the job. You are still trading your time and labor for a wage or salary.

Some may work for themselves, while others will be working for a larger employer. Flexible jobs, telework, and remote jobs are common names for jobs you can work from home.

Examples of some lucrative online active income opportunities include:

• Selling your services. If you are a counselor, provide online counseling. If you are a graphic artist, help business online create logos and merchandise. If you are a writer, join writing communities like Upwork, Guru and Craigslist. Or search for writing jobs online specific to the niche in which you can write.
• Social media marketers are needed in a big way for companies wanting to grow their brands. With little time to write blogs, articles, and posts, they will hire you to do this work for them.
• Create a Blog or Website and earn money from advertisers. Building up a following is key here because you want a lot of people to click on these ads. With each ad click, you get rewarded. Google AdSense and Media.net are two of the top choices in advertisers.
• If you have expertise in something, anything, you can turn it into an online course and sell it to others who are eager to learn. Udemy is one of the best platforms for creating your course. Creating courses can also lead to great passive income.
• Sell items on eBay, Amazon or Craigslist or Facebook Marketplace.

Working from home has great benefits. But there are disadvantages too, especially when working for active income.

The advantages of online active Income jobs include:

• Less stressful work environment
• Can work from anywhere in the world
• No commuting in traffic
• Save money on gas
• Fewer distractions
• Get to spend more time with family

Disadvantages of online active income jobs include:

• Must be a self-motivator and disciplined to get work done instead of watching daytime talk shows
• You may have to wait for responses from co-workers or your boss instead of being able to walk over to their office
• Wi-Fi must be dependable and sometimes this is out of your control, like when an unexpected snowstorm hits your area
• You may feel out of the loop at times
• You don’t have access to the tech guy or girl when your computer freezes

Not one person in the active income category gets away with NOT paying taxes. Yep, the government has their hands in all things related to your active income.

Active Income and Taxes

The IRS defines full-time active income as the taxpayer working 500 or more hours in the business.

Check out the rates for 2020 in the chart below.

To help you calculate your active income tax information, the IRS developed a tax withholding estimator.This will help you find potential tax deductions and estimate your effective tax rate.

They also have an APP you can download that includes the estimator and a search tool to help you check the status of your refund.

The first section asks questions about you, the person filing taxes. They want to know if you have dependents you will be claiming, all forms of income including pensions, unemployment, scholarships, etc.

They will then ask questions about your job and how much money, if any, you have been withholding throughout the year. Further, they will ask about adjustments, deductions, and tax credits you can receive.

Then, the results.

The great thing about being American is that you can choose how you want to make your money. There are no limits on how much you can earn. The key is figuring out the right way to earn the most money.

Some people choose to only participate in active income opportunities. Some choose to combine active income with passive income. There are some who have found a way to make a lot of money using only passive income methods.

What is Passive income?

Passive income is money you earn that does not require you to be directly involved. In the beginning, you may need to be involved, but for much of the time, you are earning money with little effort. There are plenty of passive income books and courses, many of which don’t set the proper expectations.

To be clear, passive income opportunities often begin with a large active income investment. If you want to generate passive income, you need to invest time and money upfront. After this initial investment, however, you earn money with no extra work required on your end.

Many people who earn passive income actually invest more time in their passive income streams than they would at a traditional job. While some people like the idea of not working at all, most passive income earners are more interested in the freedoms associated with a passive income stream.

Make sure you make this differentiation before you start. Passive income isn’t necessarily “easy money.” It is simply income that you can earn passively. While there are certain sources of passive income that require little or no effort (i.e. dividend investing), others require a lot more (i.e. investing in rental properties). More on this later.

Benefits of Passive Income

• Very small overhead costs
• No payroll taxes
• Get to claim depreciation, depending on your passive income trade (favorable tax treatment)
• You earn money even when you are not working, even while you sleep
• Most passive income sources are scalable and can grow larger with little effort
• Tax rates are better because they are calculated as long-term capital gains

Passive Income Examples

Let’s talk about some of the best passive income opportunities happening today.

Rental Property

Real estate investing is a popular method for generating passive income. Investors can buy a rental property that will generate income every month.

You buy a property and rent that property to a tenant who is required to pay you a monthly fee. Every month you receive payment from the tenant. Your rental property is an income-producing asset that will pay you every month.

You can choose to own real estate in both the commercial and residential sectors. Owning commercial properties means you will rent your properties to other businesses. Let’s say you have a huge warehouse building. You can choose to rent the entire warehouse to a company that needs large space.

Or, you can divide the warehouse into multiple office spaces and rent all spaces to different companies.

As a real estate investor, the work you do upfront will set you up to receive passive income for many years to come. Your income becomes scalable too. Because your property goes up in value over time, so can your monthly rental fees.

The fees paid monthly are just one source of income. The more properties you own and rent, the more monthly sources of income.

The rental fees you receive can cover the cost of any mortgage you may have. However, the way to true wealth is to pay cash for your properties. This means every dollar received goes into your pocket, not the bank.

And there are even some great tax benefits for you:

• There are no self-employed or FICA taxes paid on rental income
• You can deduct any depreciations
• If you want to refinance, you can do so tax-free
• Get tax breaks if you buy in areas the government considers “opportunity zones”, which are areas that need to be brought back to life

Real estate investment is not the only type of passive income opportunity. Another is to create something that earns royalties.

Royalties

When you think of royalties, you may only think of musicians, big-time authors, or actors. They earn big royalties when their works are purchased, downloaded, and even replayed on television.

You can earn royalties too. With the right product, you can turn this passive income opportunity into huge paydays. Here are some examples:

• Write an eBook and self-publish it on Amazon. Depending on how you set up your payments, you can receive 70% royalties. You can also create journals, audio books, paperback books, planners and calendars under Amazon kindle.

• Selling photographs and other digital products on sites like Etsy, Shutterstock, and your own website can mean making money from one product over a long period.
• If you are techie, in any way, you may want to try creating software or better yet, an APP people can download to their smart phones. If your program or APP becomes popular, you can expect large royalties. And if you add an upsell of a subscription product, even more money can come your way passively.

Pursuing royalties is a great way to graduate from hourly wages to passive sources of income. You can take your active income source and find a way to make it passive. For example, a CPA relies on hourly wages or ordinary income. If that CPA creates an online eBook related to taxes, the income received will be passive.

If you have an existing skillset you use to generate regular income, think of ways you can turn your skillset into passive income.

Affiliate Marketing

Affiliate marketing is a form of referral marketing where you get paid commissions when you sell products from other businesses.

Affiliate Marketing requires some active income work on the front end. You will need to build a platform. You can do this through your own website, a blog, and social media outlets. Building a great fan base on all three will help you earn many passive dollars.

With affiliate marketing, you will be promoting products of other businesses. One way this happens is through blogging. For example, you can write a blog on the best laptop computers of 2020. Before you write your blog, you will need to become an affiliate of the products. Or, you can become an affiliate marketer through Amazon and write about only items that are for sale on Amazon.

In your blog, you will link each laptop to its landing page on Amazon. Each time one of your readers clicks on that link, Amazon pays you a referral fee or a commission.

Pretty cool, right?

How to Make the Most Money

You are probably ready to get started, or continue, earning income. If you are already an active income earner, you may be thinking about switching to passive opportunities. If you are a passive earner, you may want to try an active job to build your wealth.

The best tip is this, don’t choose one or the other. Instead, choose both.

Find a way to balance both a passive and active way of earning more income. If you are the reigning king of sales (active) in the pharmaceutical industry, try writing a “How to Be the Reigning King of Sales” eBook and self-publish it on Amazon in all formats (passive).

Or, maybe you have written a bunch of eBooks, published them on Amazon, and are rocking it in royalties (passive). You can take those skills and become an online or in-person consultant, teaching individuals or business owners how to do the same. You may even get hired to write books for others as a ghostwriter, allowing you to charge high fees for your service (active).

To choose the passive and active jobs to pursue, follow these guidelines: have a great deal of knowledge in the area; have a passion for it; charge what you are worth and don’t settle for less; and have fun.

There is no need to wait. You can start today pursuing both your active and passive income opportunities.