Passive income, also often referred to as residual income, isn't a completely new idea, but its one that has gained more and more traction over the past 20 years, in large part because of technological developments like the Internet. Technically, the IRS divides income into three broad categories; active income from the 9 to 5, portfolio income, such as might be earned in stocks and mutual funds, and passive income, which is resultant income from "trade or business activities in which you do not materially participate." This one definition of passive income, and although the definition is correct, for many people there term has a much different meaning. Whether earned online or from "real life" endeavors such as real estate or earning interest on loans, passive or residual income can be a way to generate steady, long term income through a variety of sources increasing your financial peace of mind.

The most common types of passive income include royalties from art (books, movies, etc), rent from properties, income from Internet advertising, and recurring commission based sales The beauty of passive income is that it has the ability to grow. Take for instance rent from properties. Buying new properties and opening up new rentals opens the door for greater passive income. If your passive income is commission based, increasing the number of clients will increase your level of passive income.

One of the greatest benefits of passive income is that it requires little or no effort to keep it going. Take for instance internet advertising. Once an article is posted, it's posted. Little else has to be done to maintain an article after its online, and it can begin earning money. A second benefit to passive income is diversification. Passive income like any other is subject to flux high and low but unlike active income, passive income is difficult to eliminate entirely. A person working a 40-hour week stands to lose a substantial chunk of their income if they lose their job. With passive income, the loss of one part of your income is like losing a branch off a tree. It hurts but the remaining income is unaffected.

One drawback to passive income however is that it is taxable. Make sure to document whatever money you have coming in to accurately report it to the IRS.

In some states, ventures like internet advertising fall under the business category of freelance writing and require business licensing. Business licensing requires the payment of small business taxes. Check out state and city business laws to make sure your passive income doesn't require any licensing.

On a cautionary note, passive income can also be used as the bait for many Internet based scams. Several sites offering resources to work from home, generate thousands of dollars each month or never have to work again because your money works for you are fraudulent. If promises sound too good to be true they usually are. If looking for viable sources to generate passive income do your due diligence to find the means to generate a legitimate passive income.

Online Residual Income
One of the more popular ways of making residual income is online. Affiliate sales, AdSense, selling advertising space, all these are just some of the ways that thousands and thousands of people can use the Internet to make passive income. This is currently the method that is most often referred to when someone is talking about passive income. People can use free sites like HubPages or Squidoo to make websites that they can earn passive income on through Amazon affiliate sales, AdSense split, or other affiliate links you can add to your pages. You can also set up free blogs with Amazon products and AdSense, or buy a domain name for $10 or less, unlimited hosting for $10, and set up several websites that you can monetize anyway you want. Over time, and by learning to rank in the search engines, these sites will make you some pretty good passive income that simply continues to grow over time once you learn SEO and some basics of Internet Marketing.

Even for those people who are more keen to freelance writing and just not as good at the SEO side, the SEO is a skill you still need to learn, but aside from HubPages and Squidoo writers can still write for passive income or for a share of AdSense split by looking at sites like eHow, Xomba, InfoBarrel, or others. While not as good, Associated Content also has a pay per page view bonus that acts as a passive or residual income source.

The opportunity for earning more income is about as close to unlimited as you can get. The online world unfortunately has a lot of frauds trying to take advantage of this, but there are some really good websites out there which give good honest information. Some of the sites I trust most include Allyn Hane's "Blogger Illustrated" Blog, Lissie's "Make Passive Income Blog" and yeah, I'll toot my own horn with my Master Dayton freelance writing blog

Beyond this it's all about hard work, learning, and honing your skills as you go along. People who are stubborn, persistent, and driven will be able to make some very good (even full time) passive income if they're willing to put the work in.

Passive Income, In Conclusion
There are many ways to build passive income, and this time of income is what athletes would refer to as a "game changer." It's hard to hit that perfect "X" number you need for your ideal retirement, but it's a lot easier when you know you're getting a couple thousand every month in income even when you don't have to work, because that retirement savings number doesn't have to be nearly as high. In addition, paying off debts is much easier when there is "hands off" money coming in. Everyone talks about how they'd like to make $20,000 more a year, well building up passive income is like doing just that. You do the work and watch it keep paying off over the long term. Whether from more conventional methods like stocks paying dividends or collecting rent, or from online methods like HubPages, Amazon affiliate sales, or AdSense, there are many ways to build up the residual income and use that to help enjoy the life you want.