I am curious to know if an Insurance Agent, who receives 1099misc Box 7 Income from the company to which they broker for, is all subject to self-employment tax. Certainly a portion of the income received would be for new business and active participation, but the rest of the income would be from residuals for policies written in years past that don’t require much if any effort on the part of the agent. Is there a revenue ruling or other precedence set in allowing a portion of the income to be passive and therefore not subject to Self-Employment taxes?

No. Those are earned income by definition, pure and simple. The textbook definition of earned income includes wages, tips, COMMISSIONS, etc., yadda yadda.

There is no legal basis to consider this as passive income. Passive income includes such things as rents and royalties and is a totaly separate and distinct area of tax law.

Nor is there any legal basis to consider this as unearned income. Unearned income includes dividends, interest, capital gains, etc.

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I read that the key to wealth is the ability to turn earned income or money you work for into passive income, incremental money you receive each month or on some recurring basis that you don’t work for. Though that sounds great in theory how does it work in practice? I know rental income is a form of passive income. Can anyone think of other ways to make money that is not tied to your labor?

Instead of talking theory, I will explain exactly how you can do this. Open a Roth IRA account. Deposit $4000 a year into the account. Invest the deposited money into a diversified portfolio of equity investments. Historically equity investments have returned about 10% annually and some much more 14%. Assuming 10% average annual return in 35 years your account will contain over $1,000,000 and it will be earning a passive income of $100,000 on average annually.

Now here is the best part. Because it is in a Roth IRA account all that money will be tax free. WOW.

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