Understanding State Taxes: A Basic Guide for Individuals and Small Businesses

Welcome to another installment of our Taxes 101 series! Today we’re diving into something that affects every American but often gets overshadowed by federal taxes: state taxes. Whether you’re filing your first tax return or you’ve been at this for years, understanding how state taxes work can help you make smarter financial decisions and avoid costly surprises.

At JCT Tax Solutions, we often work with clients who understand their federal tax situation pretty well but have questions about their state obligations. Don’t worry—once you understand the basics, it’s not as complicated as it might seem.

Why State Taxes Matter More Than You Think

Here’s the thing about state taxes: they can significantly impact your overall tax bill and financial planning. Unlike federal taxes, which are the same everywhere, state tax rules vary dramatically depending on where you live, work, and do business.

Some states have no income tax at all, while others have rates that can exceed 13%. Some states rely heavily on sales taxes, while others focus on property taxes. Understanding these differences can influence major life decisions—from where to live and work to how to structure your business.

State Income Tax: The Basics

Most states collect income tax, but the rules vary widely from state to state.

How State Income Tax Works

Just like federal taxes, state income tax is typically calculated as a percentage of your income. However, states use different approaches. Some states use a flat tax where everyone pays the same rate—Illinois, for example, charges 4.95% regardless of your income level. Others, like Minnesota, use a progressive system with brackets where higher earners pay higher rates (ranging from 5.35% to 9.85%). And seven states don’t tax individual income at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming.

Minnesota State Income Tax

Since we’re based in Minnesota, let’s look at how it works here. Minnesota uses a progressive tax system with four brackets for 2025:

5.35% on the first $32,570 (single) / $47,620 (married filing jointly)
6.80% on income from $32,571-$106,990 (single) / $47,621-$189,180 (married filing jointly)
7.85% on income from $106,991-$198,630 (single) / $189,181-$330,410 (married filing jointly)
9.85% on income over $198,630 (single) / $330,410 (married filing jointly)

For example, a single filer earning $50,000 would pay 5.35% on the first $32,570 and 6.80% on the remaining $17,430.

Minnesota also offers its own standard deduction and various credits that can reduce your tax bill.

Special Situations for State Income Tax

Multiple States: If you live in one state but work in another, you might need to file returns in both states. Most states have agreements to prevent double taxation, but the rules can get complex. As an Enrolled Agent, I wish I could give you a general rule to follow here, but it truly varies state-to-state.

Remote Work: With more people working remotely, state tax issues have become more common. Generally, you owe taxes to the state where you physically perform the work, not where your employer is located. This creates additional complexity for both remote workers and their employers when they’re in different states.

Business Income: If you own a business, state income tax rules can affect how you structure your business and where you choose to operate.

Sales Tax: Every Purchase Adds Up

Sales tax is something you encounter almost daily, but many people don’t realize how much it affects their overall budget.

How Sales Tax Works

Sales tax is collected at the point of purchase on most goods and many services. Unlike income tax, you pay it immediately when you buy something.

In Minnesota, the state charges 6.875% sales tax, but that’s not the whole story. Cities and counties can add their own local taxes on top of the state rate, which means the total sales tax you pay can range from 6.875% to 8.875% depending on where you’re shopping.

What’s Taxable?

Generally, most physical goods are subject to sales tax, but services often aren’t. However, this varies by state. In Minnesota, you’ll pay sales tax on most retail goods, restaurant meals, and hotel stays. But some essentials are exempt—like most groceries, prescription medications, and clothing items under $100.

Sales Tax and Your Business

If you own a business that sells taxable goods or services, you’ll need to:

Register for a sales tax permit with your state
Collect sales tax from customers
File returns and remit the tax to the state (usually monthly or quarterly)
Keep detailed records of all sales and tax collected

Missing sales tax obligations can result in serious penalties, so it’s important to understand your responsibilities from day one.

Property Tax: The Third Piece of the Puzzle

Property tax is a local tax (not technically a state tax, but often administered through state systems) that funds essential services like schools, police, fire departments, and road maintenance. Property tax is based on the assessed value of your property and the tax rate set by your local government.

Property Tax in Minnesota

Minnesota property taxes are among the more complex in the nation because they use a system called “classification rates” that treats different types of property differently.

For homeowners, there are a few key things to understand. Your primary residence gets favorable treatment through homestead classification, and the first $500,000 of your home’s value is taxed at a lower rate thanks to the homestead exemption. Most property taxes are due in two installments—May 15 and October 15—so it’s important to plan for those payment dates.

Property Tax and Your Business

If you own commercial property or operate a business from your home, different rules may apply. Commercial property typically faces higher tax rates than residential, and running a home business might affect your homestead classification. Additionally, business equipment and inventory may be subject to personal property tax.

Common State Tax Mistakes to Avoid

Based on our experience helping clients, here are the biggest mistakes we see:

For individuals, the biggest issues we see are not filing in all required states when you move or work across state lines, forgetting about local income taxes in cities like New York City or Philadelphia, and missing estimated tax payments if you have significant state tax liability.

For small businesses, the most common problems are not registering for sales tax when required, mixing up nexus rules (the rules about when you owe taxes in a state), and forgetting about use tax on out-of-state purchases.

State Tax Planning Strategies

Understanding state taxes opens up several planning opportunities:

For individuals, this might mean timing moves to minimize state tax impact, retirement planning that considers state taxes on retirement income, or investment planning that takes advantage of state-specific incentives.

For businesses, opportunities include choosing business structure based on state tax implications, managing nexus to minimize multi-state filing requirements, and taking advantage of state-specific business incentives and credits.

The Bottom Line

State taxes might seem secondary to federal taxes, but they can have a huge impact on your finances. The key is understanding what you owe and when, so you can plan accordingly and avoid surprises.

Whether you’re dealing with Minnesota’s progressive income tax, navigating sales tax for your business, or understanding property tax on your first home, the rules matter—and they’re different everywhere.

One thing that can catch people off guard is that while state tax returns generally start with a figure from your federal return (like your adjusted gross income), not all states conform to federal tax law changes right away. This means you might see differences in what’s deductible or how certain income is treated between your federal and state returns, especially in years when federal tax laws change.

Remember: State tax laws change frequently, and each state has its own unique quirks and requirements. What works in Minnesota might not work in Wisconsin, and what’s true this year might change next year.

When to Get Professional Help

Consider working with a tax professional if you:

Live or work in multiple states
Own a business with sales tax obligations
Have complex property holdings
Are planning a move to a different state
Receive income from multiple sources across different states

State taxes don’t have to be overwhelming, but they do require attention to detail and staying current with changing rules.

This article is part of our Taxes 101 series—designed to help individuals and small business owners understand essential tax concepts in plain English. Stay tuned for more topics that help you take control of your taxes, one step at a time.

Questions about your specific state tax situation? Whether you’re dealing with multi-state issues, business sales tax requirements, or planning a move, we’re here to help. Contact us today to schedule a consultation and get personalized advice for your situation.

This overview of state taxes is general in nature and hasn’t been customized for your specific situation. For advice regarding your specific tax situation, please schedule a consultation with our office.