Table of Contents
- Quick Summary
- 6 Key Differences Between Active and Passive Income
- 1. Income Sources
- 2. Taxation
- 3. Operations
- 4. Potential of Growth
- Active and Passive Income Sources You Should Develop
- Active Income Sources
- Passive Income Sources
- What’s Better, Active Income or Passive Income?
- Active Income
- Advantages of Active Income
- Disadvantages of Active Income
- Passive Income
- Advantages of Passive Income
- Disadvantages of Passive Income
- Wrapping Things Up…
All sorts of income can be divided into active or passive categories. While the definitions are clear, people often misunderstand the critical differences between active and passive income.
This is why we have developed a detailed guide for you to understand these differences.
It can also help you with the selection and optimization of your current income sources.
Without further delay, let’s get right into it.
6 Key Differences Between Active and Passive Income
When it comes to active and passive income, there is one easy way to differentiate them. Active income requires your active participation whereas passive income does not.
With that said, let’s see how these income and their sources are so different from each other.
1. Income Sources
The biggest difference between an active income and a passive income is the source. It is also important to know that a single source can act both, active and passive.
You can easily tell whether an income is active or passive by its nature. Something that requires your physical presence is often an active source of income.
On the other hand, a source that doesn’t require your physical presence is often linked with passive income.
What are some examples of such sources?
Let’s say, you have a job that needs to drive and work for 6 hours. The incentive/income you get is an active income source.
On the other hand, you have an online store. Every sale you make from it is categorized as a passive income.
As you can see from the examples, one source requires your physical presence whereas the other one does not.
One key difference between active income and passive income is the process of taxation. Entities like IRS or FICO have different tax rates and treatments.
Almost every active source of income can be taxed under the income tax guidelines. Whereas, it is possible to shelter your earnings if they are from a passive income source.
Why is the tax process different from active and passive income?
It is mainly due to the expenses related to the source of income. An active income is directly put under income tax due to zero expenses.
Whereas, a passive income might include expenses like repair/management and depreciation.
So, even if you get the full amount in your account, the tax is only applied to the net income.
The next main difference between an active income and passive income is the operational aspect. Both incomes are quite unique in that regard.
For an active income, you have to travel and manage physical things. It involves paperwork and all the hassle that comes along with it.
Whereas, for a passive income, you can do almost everything digitally. For example, receiving rent on your property. You don’t actually have to physically be there to receive it.
Are there any other differences between the operations?
Apart from that, convenience is an important aspect related to both incomes. Active income is quite tedious and time-consuming.
On the other hand, passive income is streamlined and fast-track. You can get your income started in a matter of minutes.
4. Potential of Growth
Another major difference between the two incomes is your margin to grow. Since an active income usually involves a job of some kind. You have to follow the due process.
Without it, your chances to grow your skills and level of earning are quite low. When it comes to passive income, this aspect works differently.
How much can I grow with a passive income?
With a passive income, you have the room to grow your skills and learn new ones as well. There is no dependence on any other individual.
For example, you are passively earning from lending advertising space to different brands on a website. You can learn through various courses how to capitalize on it.
You don’t have to look up to a senior to assign you a training activity. This way, you can transform your portfolio rather quickly.
Active and Passive Income Sources You Should Develop
Now that you know the critical differences between both incomes, let’s check some of their sources. These sources can help you improve your financial conditions.
Active Income Sources
An active income source includes anything that requires your physical presence. For example, a job, a service, commissions, or actively participating in a business.
Here’s a list of active income sources:
- Digital marketing
- Virtual assistant
- Graphic designing
- Online tutoring
- Stock trading
Passive Income Sources
As you already know that passive income sources don’t require your active participation. For example, providing advertising space on a billboard.
Here’s a list of passive income sources:
- Online stores
- Stock dividends
- Selling merch
- Selling online courses
- SEO optimization
It is important to note that these aren’t the only income sources out there. You can find various active and passive income sources in different fields.
What’s Better, Active Income or Passive Income?
It’s a matter of debate among many experts as to whether you should opt for an active income or a passive income. Both have their advantages and disadvantages.
On paper, both are good for you. Mainly because in the current state of the world, any income is good income. Now let’s check their benefits and downsides.
Advantages of Active Income
- Field specialization
- Higher return on services
- Option for civil and federal jobs
- A vast number of opportunities
- Portfolio growth
Disadvantages of Active Income
- Long work hours
- Require physical participation
- Harder to switch fields
Advantages of Passive Income
- Lesser work hours
- Ability to change fields
- Can be turned into active income
- Doesn’t require physical participation
- Multiple income streams.
Disadvantages of Passive Income
- Has a certain limit on earnings
- Harder to manage growth
- Specialization is hard to come by
Wrapping Things Up…
With that said, we are at the finish line of our post on the differences between active and passive income. We hope this information proves to be beneficial for you.
Active and passive income have their own merits through which they can benefit you. An active income can help you explore different jobs while a passive income provides you with extra time. Either of them can help you explore your career path.
If you have any questions, feel free to reach out in the comments below.