South Dakota does not have a state income tax

South Dakota is one of nine states with no state income tax on wages, salaries, or other personal income. You will not owe South Dakota income tax on money you earn, regardless of how much you make or what type of work you do. This applies to residents and to people who work in South Dakota but live elsewhere.

The state funds its operations through sales tax, property tax, and business taxes instead. South Dakota's sales tax rate is 4.5 percent statewide, though individual cities and counties can add local sales taxes on top of that. Some counties charge as much as 2 percent additional sales tax, bringing the total to 6.5 percent or higher depending on where you shop.

Key Takeaways

  • South Dakota collects no state income tax on wages, salaries, retirement income, or investment gains.
  • You still owe federal income tax to the IRS, and South Dakota's lack of state income tax does not change your federal filing requirements.
  • South Dakota funds state services through sales tax (4.5 percent base rate) and property tax instead of income tax.
  • If you moved to South Dakota from another state, you do not need to file a final state return in your former state for income earned after you left.

What income is not taxed in South Dakota

South Dakota does not tax wages from employment, self-employment income, retirement distributions, Social Security benefits, investment income, capital gains, or interest earned on savings accounts. If you receive income from any of these sources and live in South Dakota, the state will not levy a tax on it.

This means a retiree living on Social Security and pension payments owes no South Dakota state tax. A freelancer or business owner pays no state income tax on their net earnings. Someone who sells stock or real estate and realizes a gain pays no South Dakota capital gains tax. The only exception is that certain retirement account withdrawals may be subject to specific rules, but the income itself is not taxed by the state.

You still owe federal income tax

South Dakota's lack of state income tax does not reduce what you owe to the federal government. You must still file a federal tax return with the IRS and pay federal income tax based on your income level, filing status, and deductions. The IRS tax brackets and rates apply the same way they do to residents of every other state.

When you file your federal return, you will report your total income and calculate your federal tax liability. South Dakota residents use the same IRS forms and follow the same rules as everyone else. The state simply does not add its own layer of taxation on top of the federal amount.

How South Dakota funds state services without income tax

South Dakota relies on sales tax as its primary revenue source. The statewide base sales tax rate is 4.5 percent, applied to most retail purchases. Cities and counties can add their own local sales taxes, which range from 0.5 to 2 percent depending on location. A purchase in Sioux Falls, for example, may be subject to a total sales tax of 6.5 percent or more.

Property tax is the second major funding source. South Dakota assesses property tax on real estate and some personal property, with rates varying by county and municipality. Businesses also pay corporate income tax and other business-related taxes. The combination of these revenue streams allows the state to fund education, infrastructure, social services, and other state operations without taxing individual income.

What to do if you moved to South Dakota from another state

If you relocated to South Dakota from a state that has income tax, you do not need to file a final return in your former state for income you earned after you moved. Once you establish residency in South Dakota, you are no longer a resident of your previous state for tax purposes. You should update your address with the IRS and your former state's tax authority to reflect your move.

For income earned before you moved, you may owe tax to your former state depending on when you left and how that state defines the tax year. Contact your former state's department of revenue if you are unsure whether you have a filing obligation for the year you moved. Some states allow you to file a part-year resident return covering only the months you lived there.

Self-employed and business owners in South Dakota

If you are self-employed or own a business in South Dakota, you do not pay state income tax on your business earnings. You will still owe federal self-employment tax and federal income tax on your net profit. You must file Schedule C with your federal return to report business income and expenses.

South Dakota does require businesses to register with the state and may require certain licenses or permits depending on your industry. Some businesses also pay South Dakota's corporate income tax or franchise tax, though sole proprietors and many small business structures do not. Consult a tax professional or the South Dakota Department of Revenue if you need clarification on what state business taxes apply to your specific situation.

Frequently Asked Questions

Do I have to file a state tax return in South Dakota?

No. South Dakota has no state income tax, so there is no state tax return to file. You only file a federal return with the IRS. Some states require residents to file a return even with no income tax, but South Dakota does not.

Does Social Security count as income in South Dakota?

Social Security benefits are not taxed by South Dakota. You will not owe state tax on your benefits regardless of how much you receive. You may still owe federal tax on your benefits depending on your total income, but that is a federal rule, not a South Dakota rule.

If I work in South Dakota but live in another state, do I owe South Dakota tax?

No. South Dakota does not tax income earned within the state by non-residents. You owe income tax only to the state where you live. Your home state may tax your income even though you earned it in South Dakota.

Are retirement account withdrawals taxed by South Dakota?

Withdrawals from retirement accounts like IRAs and 401(k)s are not taxed by South Dakota. You may owe federal income tax on the withdrawal depending on the account type and your total income, but South Dakota imposes no state tax on retirement distributions.

What if I receive a 1099 for freelance work done in South Dakota?

You do not owe South Dakota state income tax on 1099 income. You will owe federal self-employment tax and federal income tax on your net earnings. File Schedule C with your federal return to report the income and any business expenses you incurred.