What is passive income?

December 2023 | Published by Xero

Passive income (definition)

Passive income is money that you don’t have to actively work for; it comes in from something that already exists and continues to work for you.

While active income is earned by working a job or owning a business, passive income is earned without having to work too much for it on an ongoing basis. It’s a way of keeping money rolling in after you’ve clocked out.

Having a passive income means you can keep earning from anywhere, by the poolside or off on holiday. It takes pressure off having just one income stream, and is less work in the long run. Bear in mind that there may be more work at the outset, as passive income streams may require setting up a platform or product, or investing money.

Types of passive income

Passive income can be part of your own business offering, a separate business revenue, or be completely non-business related.

There may be differences between countries when it comes to the specifics of passive income and how it’s taxed so check with your tax authority for their definition. And an accountant or tax advisor can also provide guidance.

Part of your business: You can create passive income by offering your skills, knowledge or resources as a product that can be purchased without your presence.

Separate business revenue: You can invest in a business (such as through peer-to-peer lending) or become a partner or silent investor in a business (such as in a limited partnership).

Non-business related: You can create a passive income stream from activities like investing in the stock market (buying shares) or property market (rental properties). It may also include having money in high-interest savings accounts or term deposits. However, some tax authorities consider interest and dividends as portfolio income rather than passive.

Examples of passive income as part of a business

If you own a business you can sell your knowledge, skills and resources to create a passive income stream. Whatever your business, you’re likely to have industry knowledge that would be of value to others.

Capitalise on your knowledge and skills

If you’re a tradie, start a YouTube DIY channel. If you’re a dressmaker, offer downloadable patterns. If you’re a photographer, artist or musician, sell your images or music as a stock library.

Other monetisable ideas are:

  • downloadable PDFs with expert information
  • ebooks, audiobooks and podcasts sharing your experience
  • a subscription-based YouTube channel to address a need in your industry
  • an online course sharing your knowledge in an area
  • digital templates relevant to your field of work

Capitalise on your resources

  • rent out office space, parking space, or cars during unused times
  • look at what expenses you outsource the most, and bring that in-house as a service you can charge others, eg, if you’re in the audio sector (podcasts or marketing), set up a studio in-house and hire that service out
  • promote other people’s products or services on your website for affiliate marketing commissions

See related terms

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This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.