Passive Income 101: How to Get Started

In a time when inflation and rising housing prices are impacting millions of Americans, many individuals are realizing that they need a second job just to stay afloat.

But landing another gig that works with your existing work and family schedule can be tricky. One solution is to create a stream of passive income, where money can be earned with minimal active work on the part of the earner. Read below to learn about what passive income entails, if it might work for you and how it might impact your tax liability. 

What is Passive Income?

Passive income is a hot buzzword, but most people don’t know what it really means. Most sources of passive income require some initial work upfront to set up the money-making system. Passive income isn’t completely hands-off, but is often more flexible than a traditional job.

For example, creating a digital wedding invitation business means spending hours brainstorming and designing invitations before listing them on sites like Etsy or Fiverr. But once the designs are created, the number of hours required is much lower.   

Just like a full-time job, passive income can be fickle. One month you could be making enough to pay your mortgage and the next month you could be barely covering your Netflix bill. Counting on passive income can be unpredictable, especially if your business is being supported by a third-party company that can change their algorithm or how they promote you at any time.

How to Earn Passive Income

Dividends

Earning money from dividends is one of the truest forms of passive income. When you buy a stock that yields dividends, you will receive a dividend payout, usually quarterly. The amount depends on how many shares you have and the company’s policies.

One potential downside is that companies are not required to keep offering dividends indefinitely. If they’re experiencing lower revenues, they may suspend dividends. Another drawback is that you need to have a substantial amount of shares in order to earn significant dividends. Just having a dozen or so shares won’t result in a life-changing amount of money.

Digital Designs and Printables

If you’re a talented designer, you can make passive income by selling digital designs and printables on sites like Etsy and Fiverr. You just have to create a design, list it on a site and wait for the sales to roll in. 

Invitations, workbooks and to-do lists are some popular printable designs. Consumers can buy those designs and print them at home or through a professional printer. Blog, social media, and website templates are also popular if you can create web-based templates. 

Talented graphic designers can earn passive income by posting their creations on sites like Society6, Redbubble or Zazzle. You can decide what products you want your designs to be on including t-shirts, stickers, posters, water bottles and more. 

The initial act of creating the designs requires work, and most successful artists still actively promote their work on social media to gain more traction. 

Affiliate Revenue 

There are many companies that will give you a set amount or percentage if you direct new customers their way – think sharing a link or a coupon code. This is known as affiliate marketing.

Affiliate marketing is one of the least intensive ways to earn passive income, but it only works if you have a substantial following. 

For example, if you have 10,000 Instagram followers who rely on you for fashion advice, you can include affiliate links to your favorite outfits. But if you only have 500 followers, the chances of making a substantial amount are slim.

Peer-to-peer lending 

When a bank gives you a loan, they charge you interest in order to earn money. You can act as a bank for someone else by engaging in peer-to-peer lending on sites like Prosper or FundingCircle.

To begin, you select a borrower and fulfill their request. When they return the loan, you can choose another borrower or pocket the proceeds. 

Like with any kind of lending, there’s no guarantee you’ll get your money back. This makes peer-to-peer lending one of the riskiest types of passive income.

Streaming 

If you love to play video games and create art, streaming your activity on sites like Twitch can be a fun way to make money doing something you already enjoy. 

When a stream is done, you can edit the file and upload the video to YouTube, where you can potentially earn more money in ad revenue. 

House hacking

Real estate is a prime area for those looking to make extra money, but most options require more sweat equity and investment than people are willing to put in.

That’s where house hacking comes in. House hacking is the idea of buying a duplex, living on one side while renting out the other. If you price the rent accordingly, the rent proceeds from the other side could cover a large portion of your mortgage.

FAQs about Passive Income

Can passive income replace my full-time job?

For many entrepreneurs, passive income has become a real business that has the potential to that can replace their regular salary. 

But for others, passive income only represents a small sliver of their total earnings. Research from Hootsuite found that the average Instagram influencer with 1,000 to 10,000 followers only earned $1,420 per month.

For passive income to replace your full-time job, you usually need to build it up for months or even years before it can sustain itself. Remember, if passive income were truly easy, then everyone could do it. 

Do I have to pay taxes on passive income?

Passive income is still considered earned income, so you will have to pay taxes on it. The service that pays you will likely send you a 1099, which you will then have to report when filing your taxes. In general, try to set aside between 20% and 30% of your passive income earnings to account for the extra tax bill.

If you’re receiving dividend income, those will be taxed differently depending on your tax bracket. Talk to a tax expert if you’re not sure how to plan ahead for taxes. 

Don’t worry about knowing these tax rules. Meet with a TurboTax Full Service Expert who can prepare, sign and file your taxes, so you can be 100% confident your taxes are done right. Start TurboTax Live Full Service today, in English or Spanish, and get your taxes done and off your mind.