Tax season insight: Why workers may benefit more from paychecks than investments

For many years, people believed the best way to earn money was through investments because capital gains were usually taxed less than income from jobs. But this tax season, things are changing and workers may actually get bigger tax savings from their paychecks. New tax rules are slowly closing the gap between taxes paid on job income and taxes paid on investment income. In some cases now, money earned from work can end up being taxed less than money earned from investments.

A major reason behind this shift is a new law called the One Big Beautiful Bill Act (OBBBA), which introduced big tax cuts that mainly benefit workers instead of investors. The law gives special tax deductions to hourly workers, especially those who earn extra money through overtime work or tips, allowing them to keep more of their income tax-free.

No tax on overtime and tips

Under the new rule, individual workers can deduct up to $12,500 of overtime premium pay from their taxable income. This overtime premium is the extra half portion workers get in “time and a half” pay, according to Yahoo Finance. Service workers who receive tips can also deduct up to $25,000 in qualified tips from their taxable income under the new tax law. However, this “no tax” rule only applies to federal income tax, not all taxes, said Greg Monaco, CPA and founder of Monaco CPA,


Monaco explained that FICA taxes still apply to wages, tips, and overtime, meaning workers still pay payroll taxes even if they don’t owe federal income tax on those earnings. Monaco also warned that some states have not adopted these new rules. This means a worker may pay zero federal tax on overtime but still owe 6% to 10% state income tax. These deductions also start reducing for higher earners.

Bigger standard deduction in 2025

The benefits begin to phase out for people with a modified adjusted gross income above $150,000, or $300,000 for married couples filing jointly.For workers who qualify, money that would normally have been taxed at their regular tax rate in 2024 could effectively be taxed at 0% in the 2025 tax year, according to Yahoo Finance. Another major change in the tax law is a bigger standard deduction, which allows people to reduce the amount of income that is taxed.

Child tax credit for families

For the 2025 tax season, single taxpayers can claim a $15,750 standard deduction, which is higher than the $14,600 deduction available in 2024. This means single filers get an extra $1,150 of income that will not be taxed at all, effectively giving them a 0% tax rate on that portion of their earnings. Older Americans get an even bigger benefit. People who are 65 years or older can claim an extra $6,000 deduction on top of the standard deduction. However, this additional deduction for seniors starts phasing out if their modified adjusted gross income goes above $75,000, or $150,000 for married couples.

Families with children are also seeing a benefit through a higher child tax credit, which helps reduce the tax bill for parents with children under age 17. In 2024, eligible families could claim up to $2,000 per child, but this amount increased to $2,200 per child for 2025. Some families may also qualify for the Additional Child Tax Credit (ACTC), which allows them to receive part of the credit as a refund even if they do not owe taxes. Families who earn at least $2,500 in income from work may receive up to $1,700 of the child tax credit as a refund.

Investment taxes mostly unchanged

While workers are getting several tax advantages, investment income rules mostly stayed the same, meaning investors did not receive similar new tax breaks. The tax rates on long-term investments still remain 0%, 15%, or 20%, depending on how much a person earns, as stated by Yahoo Finance. The income limits for these investment tax brackets were only slightly adjusted for inflation, which is much smaller compared to the new benefits given to workers.

Greg Monaco explained that the change can clearly be seen when comparing workers and investors earning similar amounts. Monaco gave an example of a service worker earning $65,000 through wages, tips, and overtime compared to an investor with similar income from long-term capital gains. After applying the new OBBB deductions, the worker’s next dollar of income may only be taxed at 10% to 12%, according to Greg Monaco, cited by Yahoo Finance.

Meanwhile, the investor would still pay about 15% tax on each additional dollar from long-term investments, Monaco explained. Monaco called this a historic shift, saying that ordinary job income can now be taxed at a lower rate than long-term investment income in some situations. Investors with higher income may also still face an additional 3.8% Net Investment Income Tax (NIIT) on investment earnings above certain limits.

Tips vs dividends tax

This surtax generally applies when a single filer earns more than $200,000. A simple example shows how the difference works. If someone earns $5,000 in tips, the new deduction could allow them to pay zero federal income tax on that money, as per the report by Yahoo Finance. But if another person earns $5,000 from qualified dividends, that income could face a 15% capital gains tax.

That means the worker keeps the full $5,000 after federal income tax, while the investor may keep about $4,250 after paying around $750 in taxes. Because of these new rules, experts say workers should carefully check their tax documents to make sure they receive the correct deductions. Workers should review their W-2 forms, especially the sections that show overtime earnings and tips for the 2025 tax year. If employers did not clearly separate these earnings on the form, workers should check their pay stubs to calculate how much overtime or tip income they can deduct.

Taxpayers will also need to fill out a new IRS form called Schedule 1-A to claim the deductions for overtime and tips. This form can be accessed directly from the IRS website or through tax preparation software. Experts say the new tax law also adds complexity because workers must check whether they qualify, when the benefits phase out, and how to calculate the eligible deduction amount. Because of this complexity, many taxpayers may benefit from consulting a tax professional to make sure they receive the correct tax savings and avoid filing mistakes.

FAQs

Q1. Why may workers pay less tax than investors in 2025?

New tax rules give deductions on overtime, tips, and higher standard deductions, which can lower workers’ taxable income more than investment income.

Q2. Are tips and overtime completely tax-free now?

No, the deductions remove federal income tax on some amounts, but workers may still pay payroll taxes and state taxes.