Active Income: What It Is and What It Is Not
What is Active Income?
While there are two types of income, both active and passive income, most employees only receive an active income which is money or commission received from completing a job either full-time, part-time or could be seen as tips received. The definition of active income is straight-forward, but it has some nuances that we will talk about below.
An active income can be in the form of a set salary, which is received monthly, hourly wages, or bi-weekly wages. Some employees who obtain hourly wages as an active income can also generate a larger sum by working overtime or completing additional tasks.
In some cases, employees may receive a commission as an active income, this is usually pertained as a percentage of a total lump sum of money. The percentile thereof, either 1%, 3%, 5%, or anything in between is then paid to the employee as an active income. Working on a commission basis does not however secure a set salary or wage amount and can be different each time.
What is an Active Income Not?
While it’s possible to receive both an active and passive income, some people tend to get confused about the difference. Let’s see what active income is not:
- Any additional money or earnings received from an income-producing asset such as a rental income, investments, trading, or business investment is not active income. It is referred to as a passive income.
- A passive income or passive capital usually exists because an employee invested a portion of their active income into an income-producing asset. For example, an employee saves up a portion or percentage of their salary to purchase a house which they later rent out to receive a passive income. This investment generates wealth over time, while the investor, in this case, the employee, is not actively involved in the process of generating the passive income.
Check out here to get more insight about how active income is different from passive income.
Summary
Some basics to remember about active income:
- Active income is received each week, bi-weekly or monthly as is referred to as a salary or wages.
- Bonuses and commissions resulting from a job and based on performance is also active income.
- Active income can also be commission or tips received for working overtime.
- Self-employment income that comes from running a small business (sole proprietor, consultant, freelancer) is considered active income.
- Active income is also the money received from side hustles and gigs.
The below ones will fall into the category of passive income:
- Income received from an income-producing asset, i.e. investments or a rental property.
- Any income that requires capital investment from a person, which does not actively involve the investor.
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2 Represents an net annualized return, using an internal rate of return (IRR) methodology, with respect to the matured investments shown in your Portfolio experience, utilizing the effective dates and amounts of subscriptions and distributions to and from the investments, net of management fees and all other expenses charged to the investments.[read more]