What is active income?

Active income is a type of service-based income and is often defined in terms of its relationship to passive income and portfolio income. While active income comes from business services or benefits with which the recipient is directly involved, passive income comes from businesses with 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 he rents would receive both active and passive income. Your active income would come from your telemarketing job and your passive income would come from your rental property. Portfolio income is a type of income that comes from investments.

The various forms of active income include money from wages, hourly wages and tips. It can also come in the form of commissions which can be or be in addition to salaries, tips and hourly wages. Another form of active income is income that comes from a business. For this type of income to be considered an asset, the person who receives the income must receive it as a result of material participation in the business. In the United States, the Internal Revenue Service (IRS) considers material participation to be the act of participating in a business on a regular or substantial basis.

In order to know whether to record a company's income as active income, you can do two things. The first step may be to consult an accountant or financial adviser who can offer information on the matter. In addition, the IRS offers a series of tests that can be applied to this type of income to determine whether it is active or passive income.

In many cases, income received as active income is deductible before it is given to the recipient. This may not be the case for people who are self-employed or who work as independent contractors. When the income is not initially taxable, the person receiving it is responsible for filing it with the IRS and paying the taxes on the income due. There are several ways to file and pay taxes on all three types of income. The best way to plan this report is to work with a financial professional.

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