Do Self-Employed Individuals Pay State Taxes?

Self-employed individuals are responsible for paying their own taxes, which includes obligations to state governments. The specific requirements and types of taxes owed depend on the state where the business operates, its legal structure, and the income it generates.

Identifying Applicable State Taxes

Most states that levy a personal income tax require self-employed individuals to pay this tax on their net business earnings. However, some states do not have a broad-based personal income tax:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

While residents in these states avoid a personal income tax, other business taxes may still apply. Washington taxes certain long-term capital gains, and New Hampshire eliminated its tax on interest and dividend income in 2025.

Beyond personal income tax, states may impose other direct taxes. These can include franchise taxes, which are a fee for the privilege of doing business in the state, and gross receipts taxes, which are calculated on total revenue. For entities like Limited Liability Companies (LLCs), many states also charge an annual registration or renewal fee.

If a business sells taxable goods or services, it must register with the state to collect and remit sales tax. The business gathers the tax from customers and is responsible for sending the collected funds to the state.

Calculating Your State Taxable Income

The process of calculating taxable income for state purposes often begins with a figure from your federal tax return. Most states use the federal Adjusted Gross Income (AGI) as the starting point, though some use federal taxable income or have their own calculation methods. For sole proprietors, the federal AGI already includes the net profit or loss from their business.

States require adjustments to the federal figure to arrive at state taxable income. Common additions include income taxed by the state but not the federal government, such as interest on municipal bonds from other states. Common subtractions might include retirement income that the state exempts from taxation or a portion of federal income taxes paid.

While most business expenses deductible on a federal return can also be deducted at the state level, there can be differences. States do not always conform to federal tax law changes, especially regarding depreciation rules. For example, a state may not have adopted federal bonus depreciation rules, requiring a different calculation for state tax purposes.

The Payment Process for State Taxes

Because self-employed individuals do not have taxes withheld from paychecks, they are required to pay their estimated state income tax liability in quarterly installments. You must verify the specific deadlines for each state, as they can vary. States provide payment vouchers or online portals for submitting these payments, and it is important to retain records like confirmation numbers for your annual return.

The annual state income tax return reconciles your total tax liability for the year with the sum of the estimated payments you have made. If your payments exceeded your liability, you will receive a refund. If you underpaid, you will need to make a final payment for the remaining balance due with your return.

Multi-State Considerations

Operating a business in more than one state introduces additional tax compliance steps centered around the concept of “nexus.” Nexus is a connection between your business and a state that creates a tax obligation. This can be established through a physical presence, such as an office or employees, or through economic nexus, which is triggered by exceeding a certain threshold of sales or transactions within a state.

An individual files a resident tax return in their home state, where they are taxed on all income, regardless of where it was earned. If that individual also earns income in other states where they have established nexus, they will likely need to file non-resident tax returns. These returns report and pay tax only on the income earned from activities within that particular state.

To prevent the same income from being taxed twice, the home state provides a credit for taxes paid to another state. This credit is limited to the lesser of the tax you paid to the other state or the tax your home state would have imposed on that same income.