These days, there are more opportunities to earn some extra money than ever before.
However, a lot of people will feel exhausted at the idea of earning additional income, when they’re so wrapped up in the time-consuming nature of their regular job.
How can they possibly do some extra work on top of that? Well, you don’t always have to.
This is where passive income comes in, another revenue stream that requires no long-term work. However, is passive income taxed?
We’ve got the answers for you! In our informative guide below, you’ll find out all about passive income and the many ways in which you can earn some.
On top of that, we have detailed information on how passive incomes are taxed.
Contents
What Is Passive Income?
To begin with, let’s define that important term of “passive income”. To put it simply, it’s a type of income that is automatically acquired, without you having to put in almost any labor or time to keep it going.
It will rarely earn you enough to act as your entire income, which is why people do it as a source of side income, adding to what you’re already earning with your actual labor and attention.
The Internal Revenue Service (the IRS, who collect your taxes) refer to passive income as business and trade activities that you aren’t manually getting involved with – not overseeing the daily running of them.
However, many passive income opportunities will ask for some upfront effort put into them by you – more specifically, some money and time.
The IRS has stated that there are two categories of passive activities. The first revolves around trade or business activities that you are not properly participating in.
On the other hand, the second category is all about rental activities. These still count even if you do participate materially.
However, these do not include activities that you have to do because they are your duties as a professional person involved in real estate.
How Is Passive Income Taxed?
Though it can provide you with some very helpful additional income, passive income is still taxed. Just like your regular full-time job, you will need to file taxes based on it.
For this reason, if you plan to take up a passive income of any sort, then you should go and speak to a professional accountant in advance.
This is so that they can lay out all the tax related side effects that will come of you taking up a passive income on the side of your regular job and full-time income.
You won’t want to reach the end of the tax year and not know how you should file your passive income.
With the help of an accountant, they can tell you about all the documents you will need to have and the records that you will need to keep in order, so that you don’t get in deep water with the IRS.
But how will your passive income be taxed? Well, it depends on the nature of it, as well as other determining factors.
If you’ve got a passive income based around renting out property, then that will be taxed in a specific way that is different to how you would be taxed if your passive income was through trade or business activities.
It is also common that passive income is taxed at the same rates as your regular job’s salary would be taxes, though this can lessen if you have deductions.
Be sure to keep in mind some other states you would need to file taxes on passive income, that you may not have thought of.
For example, if you sell a property that makes passive income, you need to pay taxes on the earnings. Similarly, if you sell off your interest from an activity that has passive income, you need to pay taxes too.
Perhaps even less obvious, you will need to pay taxes on any reward money that you have been given by credit cards.
Methods Of Earning Passive Income
There are lots of different ways that you can earn a passive income, which you will then be taxed on.
Renting Out The Spare Room
If you’ve recently got a spare room in your house, perhaps because your child has gone to college, then you can rent it out. This will earn you a passive income, though you’ll need to pay taxes on it.
Renting Out Parking Spaces
If there is demand, you may find that people will pay to park in your driveway spot.
Renting Out A Spare Car
There are apps, such as Getaround, which will let you rent out your car when you’re not driving it. However, you’ll need to ask your car insurance people so that you won’t get charged and lose the insurance coverage.
Make An Investment Fund
When people invest in the stock market, or take up investment bonds, then it’s a passive income. However, investing in these can be very risky, and you could not only make no money – but lose money too.
Therefore, check on your savings and retirement fund won’t be affected, and have a financial advisor help you out.
Affiliate Marketing
You’ll have seen this on YouTube, where your favorite people promote products to you. People do it in articles too, where they are paid to promote products to their large audience.
However, it is law that you disclose to the audience that you’re earning money on these affiliate links.
Credit Card Cash Back
Credit cards often reward you for using them, giving you money on many purchases. This passive income will need to be declared on your taxes. The same goes for cash back apps.
Final Thoughts
As long as you declare the taxes, passive income is a helpful addition to your income.
