What Is Passive Income And How Is It Taxed?

In this article, we will talk about what is considered passive income and how it is taxed. Many people get the term “passive income” confused with something that looks like active income.

We use the word passive in the opposite way to describe it. A passive income source is one where the income comes to you without your intervention.

This can be done by having an online business or website that earns money for you (and does not require you to earn before you can keep the profits), or by producing your own content that you sell or give away online to generate revenue.

There are many ways to achieve this, but the key ingredient is creating content people want to read or watch. This article will talk more about the benefits of achieving this and some strategies to do so.

To close out this section, I would like to mention that while there are several types of passive income, they all share one thing in common: You do not have to actively work to make money.

This makes it different than traditional forms of employment where you need to look busy during working hours to gain paychecks. With passive income, you maintain control over your time, which helps mitigate stress.

What is passive income?

So let’s dive into definitions! According to Merriam-Webster, passive income is defined as follows:

Passive income is income that arrives at you automatically, without you doing anything to procure it.

Definition of a low-risk investment

what is passive income and how is it taxed

An easy way to determine if an investment is considered low risk is to look at how well it performs in comparison to something similar. If this something else does not exist, you can compare your investment to nothing.

The like thing that other investments are compared to is the market as a whole. By doing this, we can tell whether or not our investment is less risky than the overall market.

If an investment outperforms the market, then its risk is lower. This is because it has shown successful results in the past while the market it is being measured against was not.

However, just because an investment underperformed the market does not mean it is riskier than the stock market.

Examples of passive income

what is passive income and how is it taxed

Creating and investing in real estate is one of the most popular ways to gain wealth through what are called “passive” incomes. By creating a rental property, you get paid monthly rent that comes in without you doing anything to attract it.

Owning a business also goes into this category because you earn profits while someone else takes care of the work involved with running the company.

Producing your own content or writing for money online falls under this umbrella as well. You create the product, people come looking for it, and you get paid for selling it!

By having these types of income sources, your financial situation can be adjusted quickly, especially if one source loses momentum. Because they were done passively, you just need to maintain interest in them to keep moving forward.

There are many other examples of passive income, but these three seem to pop up a lot. Real Estate, Business Ownership, and Writing are all great opportunities to add to your collection.

Dollar-cost-averaging your stock investments

what is passive income and how is it taxed

The next strategy is called dollar cost averaging. This term comes from investing, where you spend a set amount of money per month to ensure that you have enough for all of your investment purchases.

With this technique, you create an account with very little start up money and then add to it as funds allow. An average person starts off spending just a few dollars every week or even once a month. But over time, these amounts add up!

This way, you will have equal savings in each of your investments without having to put in a lot at one time. Plus, since it is averaged out across the years, the effect is the same on the investor!

Dollar cost averaging was popular during the Great Recession because people knew it would keep their accounts afloat. During those times, people were able to stay within budget due to it, which made it more practical.

But today, you can do it any time you want! You can pick when to use this theory depending on what types of investments you have and how much money you are willing to invest.

Consider creating a business

A way to make passive income is to start your own business or take over an existing one that pays well. But before you dive in, consider how much money you have and what kind of business is best for you.

If you don’t feel like you have enough savings to live off of while you get your business started, then thinking about starting a part-time business may be the better option.

A part-time business can easily be run from home without too many resources needed beyond a computer and some paper and pen supplies. Many people begin their career by working as a freelance writer, photographer, or public speaker — all excellent ways to earn extra money.

There are several ways to create and manage a successful business, so do some research and see which ones fit you.

Just because someone else has done it doesn’t mean it will work for you, but looking at others’ success can give you some ideas.

Consider creating a website

what is passive income and how is it taxed

A way to make passive income is through the creation of a website or app. This is typically done via an online platform that pays you for using their services to function as your site or app.

Some examples of this are sites like YouTube, where you can create your own channel and start making money from content you produce, or apps such as Shopify, where you get paid per sale for owning a business-eschewing product.

There are many other types of websites and applications that earn revenue through various means, but these two have been super popular lately. And just like with traditional jobs, you can still do it part time while investing in more advanced ways to grow your income.

This type of income isn’t always easy to come by, but when you find a source of income that you feel confident about, helping yourself out and earning some extra cash can be a nice feeling. You will also need very little overhead to get started, which makes it easier to achieve overall cost savings.

Distribute your content through blogs and social media

what is passive income and how is it taxed

Many people have made large sums of money by distributing their products and services via online channels. This is referred to as content marketing or advertising via writing, videos, eCommerce stores, and so on.

The key to successful content distribution is producing high-quality content you are passionate about that appeals to other people.

By creating content you’re interested in, you’ll be more likely to produce something people will want to read or watch. Your potential audience can find you via sites such as YouTube, Facebook, and Pinterest, but it also means starting a blog and affiliate marketing websites.

Running an online business doesn’t mean buying expensive equipment and redoing everything on a budget — there are many free ways to start building an income stream.

Start a podcast

what is passive income and how is it taxed

Starting your own podcast is one of the best passive income strategies out there! You can start with no money up front but instead use your social media skills to create an online talk show that you upload to a platform like Spotify or Apple Podcasts.

By advertising your show via different channels, people will want to listen to what you have to say and pay to do so!

Your audience can grow quickly if you are smart about how you promote your show.

It’s not too hard to get started either; most medium sized cities have at least one person who has a room full of microphones and wireless headphones, just waiting for you to give them a voice.

There are even free platforms where you can launch your podcast without having to invest in equipment or marketing materials.

Start a YouTube channel

what is passive income and how is it taxed

Starting your own YouTube channel is one of the best passive income strategies out there! And it’s not too difficult to do, either. All you need to start making money through YouTube is a laptop, an internet connection, and a lot of motivation.

Now, before we get into how to make money online via YouTube, let us discuss what kind of income you can expect to earn.

You will have to acknowledge that earning through YouTube isn’t necessarily “fast cash” or “quick bucks.” However, this type of revenue can add up (especially if you are willing to put in some effort).

Taxation is also an important factor to consider when talking about YouTube earnings. In fact, just like regular jobs, YouTube earners face significant tax obligations.

In this article, we will talk about the types of incomes received from YouTube, as well as how much taxes are owed.

About The Author

Tiara Ogabang
Tiara Joan Ogabang is a talented content writer and marketing expert, currently working for the innovative company juice.ai. With a passion for writing and a keen eye for detail, Tiara has quickly become an integral part of the team, helping to drive engagement and build brand awareness through her creative and engaging content.
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