What’s the difference?
Active Income is money you make working for someone else or trading your personal time for money (independent contractor or consulting income). Could be money your employer pays you or commission income for your sales position.
Passive Income, according to Wikipedia, “…is an income received on a regular basis, with little effort required to maintain it.”
How do you make an active business (not job), into a passive income stream: examples- hire employees and/or retain repeat customers who require little of your time)
Let’s use a real estate agent as our example to highlight the differences between Active and Passive Income.
The commissions the real estate agent earns as a result of his/her personal efforts- showing houses, negotiating contracts, coordinating inspections & escrow are, in our definition, active income. If that agent stops those activities, their income will stop too.
The same agent could pursue Passive Income by referring difficult clients to other agents in exchange for referral fees or could join a brokerge where they can participate in revenue sharing (residual income) when they help grow the brokerage and in return receive a portion of their recruited agents commission (not dissimilar from multi level marketing).
Wikipedia’s Examples of Passive Income Are:
Earnings from a business that does not require direct involvement from the owner or merchant;
Rent from property;
Royalties from publishing a book or from licensing a patent or other form of intellectual property;
Earnings from internet advertisements on websites;
Residual income, repeated regular income earned by a sales person, generated from the payment of a product or service, that must be renewed on a regular basis in order to continue receiving its benefits;
Dividend and interest income from owning securities, such as stocks and bonds, is usually referred to as portfolio income, which may or may not be considered a form of passive income.
Active Income Defined by Kaplan Real Estate
“All monies earned in the normal course of working or conducting a business are identified as active income. The bulk of active income is derived from wages, salaries, commissions, and annual operating profits from businesses and investments. Other earnings also included in this category are stock dividends, tips, prizes, awards, alimony, royalties, gambling winnings, jury duty fees, and similar income.”