Legal Definitions - active income

Active income refers to earnings derived from services performed or from a business in which an individual materially participates. It is typically income earned from direct effort, work, or significant involvement, as opposed to income generated from investments or ventures where one has limited involvement.

Here are some examples to illustrate active income:

• Example 1: A Salaried Employee
  A high school teacher receives a regular paycheck for their work instructing students, grading assignments, and participating in school meetings. This income is reported on their W-2 form.

  Explanation: The teacher's salary is considered active income because it is directly earned through their labor and the services they provide as an employee. They are actively performing duties to earn that money.

• Example 2: A Small Business Owner
  The owner of a plumbing company personally performs most of the repair jobs, manages the company's finances, and handles customer service calls. The profits generated by the plumbing business are distributed to the owner.

  Explanation: The profits from the plumbing company are active income for the owner because they are materially participating in the business. Their direct involvement, effort, and management are essential to generating the company's earnings.

• Example 3: A Commission-Based Salesperson
  A real estate agent earns a commission on each property they successfully help a client buy or sell. Their income fluctuates based on the number and value of transactions they close.

  Explanation: The commissions earned by the real estate agent are active income because they are directly tied to the specific services and efforts the agent performs in facilitating property transactions. The more active they are, the more income they typically generate.