Definition

The term residual income (also known as passive or recurring income) is commonly used to refer to income that continues to be earned even after the work is done. Residual income comes from creating or acquiring an asset that continues to pay of profits regardless of if there is still active work being done to the asset. Residual income may be treated differently by the Internal Revenue Service for tax purposes.

By contrast, active income is earned as a direct result of efforts put in. In other words, input is correlated to output. Active income is commonly earned as wages, salaries, and commissions.

It’s worth noting that the definition of residual income from a technical accounting perspective is slightly different than the colloquial one, referring to the amount of income that an individual has after all personal debts have been paid.

Residual Income Examples

A few examples of ways to earn residual income:

  • Royalties from the sale of a book or song
  • Income from the ownership of a real estate investment property
  • Proceeds from renting a spare room on AirBnB
  • Investing in loans through a platform like Lending Club or Prosper
  • Dividends earned from owning stock in a company
  • Stock photography royalties

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Related Terms

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