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What is Active Income?

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  • Written By: Diane Goettel
  • Edited By: W. Everett
  • Last Modified Date: 18 September 2016
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Active income is a kind of income that is based on services that have been rendered and is often defined according to its relationship to passive income and portfolio income. While active income comes from services or business profits with which the recipient is directly involved, passive income comes from enterprises in which the recipient is not directly involved. A person who receives income streams from his job as a telemarketer as well as from a property that he rents out would receive both active and passive income. His active income would come from his telemarketing work and his passive income would come from the rental property. Portfolio income is a kind of income that comes from investments.

The various forms of active income include money that comes from salaries, hourly wages, and tips. It may also come in the form of commissions that may or be in addition to hourly wages, tips, and salaries. Yet another form of active income is income that comes from a business. For this sort of income to be considered active, the person receiving the income must receive it as a result of material participation in the business. In the United State, the Internal Revenue Service (IRS) considers material participation to be the act of participating in a business on a regular basis or in a substantial manner.

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In order to find out if one should register income from a business as active income, one can do two things. The first step may be to consult with an accountant or financial adviser who can offer insight into the matter. Also, the IRS offers a series of tests that can be applied to this kind of income to determine whether it is active income or passive income.

In many cases, income that is received as active income has tax deductions taken out of it before it is even given to the recipient. This may not be the case for people who are self employed or who are working as independent contractors. When income is not taxed initially, the person receiving it is responsible for reporting it to the IRS and paying the income taxes that are due. There are a number of ways of reporting and paying taxes on all three kinds of income. The best way to plan for this reporting is to work with a financial professional.

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