Did you know that not all streams of income are the same? Usually, you think of regular or active income as being employed at a 9 to 5 and 40-hour per week job, or forming and running a business full-time.
But there’s actually income you can make that falls outside that category in which you earn money from alternative sources and usually are not involved in a full-time sense. Income from these activities is usually considered passive income.
There are some benefits to bringing in passive income if you do it right, and in some cases, you can even turn active income into passive income. It is helpful to understand more about what qualifies for passive income.
A Deeper Understanding Of Active Income vs Passive Income
Passive income can have some gray lines between it and active income.
For example, Investopedia describes passive income according to IRS definitions as “income from a business in which the taxpayer does not materially participate”.
They go on to explain later in the article that materially participating in the business or money-making activity would include the following:
- Spending more than 500 hours in the specific business or activity
- Spending at least 100 hours in it and that equals the amount of time any other people involved are spending in it
- A somewhat vague definition of your participation in a money-making activity being “substantially all” of your participation during the tax year It is for this reason that you should consult a CPA or other tax professional before you claim any money-making activity as passive income on your tax form.
Some freelance work may not be able to be claimed as passive income.
Popular Ways To Make Passive Income
So where exactly does the passive income come from? There are really so many sources of it that you could list hundreds of activities that would qualify for passive income.
But here’s a few that are commonly mentioned:
- Side Business And Freelancing Activities -Selling old items on Amazon and using their Fulfillment By Amazon (FBA) service
- Writing a blog and getting paid for ad clicks or impressions –Affiliate marketing where you do not actually sell items but get paid part of a sale when people buy items going through your referral link
- Freelancing by getting paid to write website content, designing an app or website interface, or even through graphic design or photography Investment Activities
- Owning dividend paying stocks or shares of index funds
- Making an investment in a start-up business such as angel investing, venture capital or silent partnering as long as you do not take any management role in it
- Investing in real estate either through REIT trading or in rental properties through a property management company, though flipping homes do not count as passive income
- Lending money through peer-to-peer lending or microloan programs
There are many more activities you could generate some profits from, but the general idea is to make money work for you without your having to work too hard for it.
Passive income isn’t necessarily the place to start out in your desire to become financially free. But as you get older and gain more experience, you can get there and potentially turn even businesses you’ve started into passive income by taking more of a back seat role as merely having equity in them while others manage them.
Five Reasons To Have Sources Of Passive Income
- You can enjoy better tax rates
Just because you have gone from working full-time to now having most of your income come through your investments or hobbies doesn’t mean you don’t get taxed.
But you likely will be able to avoid higher fees if you’re able to demonstrate that your income meets the IRS passive income guidelines. Another tax you still should be aware of particularly with investing in the capital gains tax.
- It can be just as fulfilling as starting a new business
Taking in income from passive income sources can be like starting a new business but better. Instead of having to put together a business plan, register your new business, get financing for it, and all the other cumbersome tasks, you can get the right to earning money. But the personal fulfillment part of it is just as rewarding.
- It’s a good way to scale back your workload as you near retirement
People are living longer and often finding themselves needing to retire later. Simply working full-time your entire adult life and relying on a 401(k) or pension, social security will not make you financially freedom.
Medicare is usually not the best way to ensure your nest egg is large enough to cover you once you can’t work anymore. But if you’ve established streams of passive income and know that you can get to your retirement goal through them, you could start lessening your long monotonous work shifts and ease into retirement as you get older.
- You can start checking off things on your bucket list
Once you’ve made money work for you through passive income and become financially free, you can start doing more of what you want.
For example, maybe you’d like to spend more money taking that special someone out to eat or taking your family on that dream vacation you’ve always wanted. Maybe you’ve always wanted to try that expensive and thrilling activity like skydiving.
Successful passive income earning gives you more flexibility for your lifestyle.
- You still can be a benefactor for others Along with living your own lifestyle, you can make a difference in the lives of others through your passive income streams. This can happen not only through any support you give to nonprofit organizations and local charities but even through loans or business investments that you make.
Getting capital to start and sustain a business is very tough, but your willingness to supply the capital by lending or taking an equity position could help jumpstart the next Apple or Microsoft company.
I hope that You´ll make your transformation from an active to passive income soon. I want to help you to begin Your journey!
Please like, share, and subscribe below to my form.
Dedicated To Your Success,
Begin Your Journey by signing up form below: