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Hmm, I put my foot in my mouth on this one. "Passive income" for me is defined in terms of how much time I have to spend for the income. If I have to spend a lot of time, that's active income. My statement, "it is taxed much higher than passive income" is a broad generalization, something I shouldn't have written. I put in the internet subscription fee in there because I don't have to trade time for it, and I assumed it would flow through a sensible business entity. If so, legitimate business expenses are deducted before they hit the personal tax returns. Going to a job and taking a salary on a W-2, the costs for earning the salary includes a car (usually car payments), automobile insurance, car maintenaince, fuel, toll fees (if applicable), parking fees (if applicable), lunches, daycare (sometimes), business-appropriate attire, grooming supplies, etc. Few employers will reimburse an employee for those expenses, so all of that it is coming out of pocket, money after earned income taxes. In contrast, the costs for obtaining the internet subscription fees includes server hosting, development equipment, office supplies, books, sometimes travel/commute ... and just to make sure this isn't merely a rosy picture -- accounting fees, legal fees, state fees, state taxes, county taxes, health care, amortized office furniture, office leases ... you get the idea. A number of these expenses can be paid straight out of the income generated from internet subscription fees. You're taxed on what's left over, meaning that your personal income from the business is lower, you're taxed on a lower tax-bracket than you otherwise would have, even though you can do a lot more with the money. As a disclaimer, I'm not describing or encouraging a "tax shelter"; it isn't sensible to sacrifice profits just to be able to cut the amount of taxes you have to pay. You're right about the corporate double-tax. If you're not actively involved in the corporation, then a dividend is not bad considering the time spend in it, even if it is double-taxed. I'm sure you're also aware that if the corporation compensates you through a W-2, say as a director or as a consultant, then there isn't a double-tax. You just have to spend more time. So to conclude this, I shouldn't have said that earned income is taxed much higher than passive income. Instead, I should've said that bigger chunks of your earned income gets taken away than from your passive income. But my guess is that you already know this. The important thing about passive income is the time you free up, not the taxes you may or may not save. |