The key to having a successful income is to earn two incomes- Active Income and Passive Income. To clear the difference between Passive Income vs. Active Income, let us start with the article.
About Passive Income?
Passive Income is the Income generated from any income-producing asset, but there is no direct involvement of the Investor.
Passive Incomes are generally for sustaining lifestyle and helping to aid the active income expenses.
Generally, this Income is generated from an active income source like savings from salary, sale, or similar ways.
How is it generated?
The Investor is not involved on an hourly basis of work, and neither they invest in additional substitutes for the Income like Security Tax or Mediclaim. Also, it helps the income holder pay a reduced tax liability for potential tax deductions.
Some Passive Income sources are-
- One can interest by depositing their passive Income in deposits or bonds.
- Affiliate Income
- Online courses and Product information
- Trading in the stock market and earn Passive Income.
- Partnership with any business or investing in real estate.
- Rental Income from the Real estate.
Importance of Passive Income
Passive Income is important as-
- It does not require your physical presence
- Your money-making hours are not specific, and you can earn each day
But there is a catch-
- You would need enormous time to build it
- You need to have a high active income to invest into a passive income
- You need to work hard to establish your passive Income
And that’s how Passive Income pays you while you are on vacation, sleep, or leave.
What is Active Income?
Active Income is the money earned by working in a direct firm or company like a part-time or a full-time job, receiving commissions or tips.
These earnings are generated from self-employment or having a business, and getting paid are the way of generating Active Income.
It is advisable to earn a high active income and focus on generating passive income.
How is it generated?
Earning as a full-time employee and then investing the Income to buy a house or any real estate and earn passive Income from there.
Some Active Income Sources are-
- Working as a full-time or part-time employee
- Doing overtime or extra working days on holidays or weekends
- Working as a full-time trader
- Earning commission from Real estate
- Real estate advisor
- Working in the foodservice and hospitality sector
- Freelance consultation for software or as an investment agent
Importance of Active Income
Active Income is important as-
- It gives you instant revenue and is consistent
- It does not take years to build your Income
- You can make money in a short time
Most importantly, it gives you the provision to earn passive income.
Taxation of Passive and Active Income
Active Income earned through working on a company or via a fixed job is known as IRS. FICA taxes of Social Security and Medicare taxes are applicable up to 15.3% of the total Income.
Short-term capital made via wholesale or real estate like home tax or rental tax is termed income tax.
So, People earning Active Income have fewer opportunities for Tax Deduction for reducing the amount of the payable Income Tax.
Passive Income is not termed FICA taxes, and hence there are many ways an investor can save on higher taxes through passive Income.
For ex-, A real estate investor can claim for standard rental property deductions, including depreciation, repairs, maintenance, property management fees, property taxes, etc.
For long-term tax payment, if any real estate property is sold, the taxable amount gets reduced as per the income tax level and filling status of the Investor.
So, there are higher chances for Tax Deduction on the payable tax amount of any passive income holder.
Which is Better? Active Income or Passive Income?
Keeping all the prospects in mind, passive Income is better than active Income as it generates revenue even when the individual is not working.
You can still earn money when you are on vacation, off work or if you fall asleep. But you need to keep in mind that you need to work hard to establish your passive income, and being lazy would end up your dream to trash.
But that doesn’t mean Active Income is not essential. It is the foundation of your passive income. Don’t forget that. If you want to invest in your start-up or create your blog, the investment will happen through Active Income.
Hence, Active Income plays an essential role in generating Passive Income.
How to use Passive Income and Active Income Efficiently
Active Income and Passive Income are Interconnected. The more you earn Active Income- The more efficiently you can invest in your Passive Income.
Also, if your Active Income covers all your everyday expenses, you can easily invest more in your Passive Income source.
But it would help if you keep in mind keeping emergency funds so that you do not fall into any extreme situation during any emergency.
On the other hand, if you have an excellent passive income, you can afford to take more risks for your career and shift to more dimensions.
Passive Income helps you reach your financial goal in less time (only if it is established) and with consistency.
Passive income is generated depending on the Active Income
Helps to maintain lifestyle and supports passive income
This provides a huge scope for the taxpayers to save on income tax
Passive Income can be generated through investments from Active Income
This doesn’t need you to be physically present
Generates revenue even if you are not working directly (only when it is established)
Active income is generated from wages or salary from full time work or part time work
Helps to maintain everyday along with emergency funds
There is a very narrow scope for the taxpayers to save on income tax
Active income can be generated through Job
You need to be present physically to do your job and earn passive income
Generates revenue only when you are present and is working directly
- What is the main difference between Active and Passive Income?
Active Income is generated through your part-time or full-time job, but you can generate Passive Income through minimal effort and in less time.
- Do you need to have an active income for earning a passive income?
It is unnecessary to have an active Income to generate a passive income, but it becomes helpful if you have an active income to help your investments for passive income.
It is always good to have an active income to invest for your Passive Income. Comparing Active Income vs. Passive Income, having a passive income is always helpful as it generates money when you are on vacation or sleep. But Active Income helps you to stay financially stable and also grow your passive income.