You hear “passive income” and think… Money that rolls in while you sleep, or fish, or binge-watch Yellowstone.
And hey, we love that for you. But the IRS? Not so much.
Their idea of passive income is a lot stricter. And if they decide yours doesn’t qualify, you could end up taxed harder, blocked from deducting losses, or flagged for a little extra attention. The fun kind that comes with penalties.
What Counts as Passive Income?
According to the IRS, only two types really qualify:
- Rental income (but only if you’re not heavily involved)
- Business income from something you don’t materially participate in
That’s it. Not your side hustle. Not your “hands-off” online course if you’re still answering emails or fixing broken links.
If you touch it, tweak it, promote it, or benefit from it in a way that looks active, it’s not passive.
The Part That Could Cost You Thousands
- Passive income usually skips self-employment tax. Active income doesn’t.
- Passive losses can’t always be deducted unless you have other passive income to offset them. That rental property running at a loss? It might just sit there collecting dust on your return.
- Reclassified income can mean back taxes, interest and penalties. Not to mention the IRS wondering what else you got wrong.
So if you’re reporting a bunch of “passive” income while also posting about all the work you’re doing to grow it, you might want to rethink that.
You’re Probably Doing It Wrong If…
You say it’s passive, but you’re running ads, managing the product, posting updates, or checking stats every morning. You’re not exactly sipping cocktails while money magically appears. If you’re emailing customers or making decisions that move things forward, the IRS doesn’t see that as passive. They see you working.
Even if it’s “just a few hours a week,” those hours count. The moment you show up in meetings or help steer the ship, even if someone else’s hands are on the wheel, you’ve stepped into active territory.
The IRS doesn’t care how chill your hustle feels. They care about who’s participating and how much. And if that answer is “you, pretty regularly,” it’s probably time to rethink how that income gets reported.
One More Thing to Watch For
Passive income gets tricky fast when there’s a mix of activity levels. Maybe you’re hands-off now but were not six months ago. Maybe your spouse helps run it, but your name is still on the paperwork. These gray areas are where mistakes multiply.
If there’s ever a time to get a second opinion on how your income is being reported, it’s when “passive” is not crystal clear.
Fix It Before It Becomes a Problem
If you’re earning income that feels passive, let’s double-check how it’s being taxed. You might be leaving money on the table or stepping straight into a tax trap.
We’ll review what you’re earning, how it’s being reported, and whether it’s helping or hurting you on your return. This is one of those things that’s easy to fix now, painful to fix later.
Let’s sort this out. No strings attached.
