South Dakota does not have a state income tax
South Dakota is one of nine states with no state income tax. You will not owe South Dakota income tax on wages, self-employment income, investment gains, or retirement distributions. This applies whether you live in South Dakota full-time, work there, or own a business there.
However, no state income tax does not mean no state taxes. South Dakota collects revenue through sales tax, property tax, and other levies. The state also does not tax Social Security benefits, military pensions, or private retirement account withdrawals — but you may still owe federal income tax on those sources.
If you move to South Dakota from a state with income tax, or if you work in South Dakota while living elsewhere, you should understand which taxes you do owe and which you do not.
Key Takeaways
- South Dakota has no state income tax on wages, self-employment, capital gains, or retirement withdrawals.
- South Dakota has a 4.2 percent state sales tax, plus local sales taxes that vary by county and city, bringing total sales tax between 4.2 and 7.5 percent depending on location.
- Property owners in South Dakota pay property tax to their county and municipality, with rates varying widely by location.
- You still owe federal income tax on all income sources, even though South Dakota collects no state income tax.
- If you work in South Dakota but live in another state, that other state may tax your income depending on its laws and reciprocal agreements.
What taxes South Dakota does collect
South Dakota's main revenue sources are sales tax and property tax. The state sales tax rate is 4.2 percent on most purchases. However, most cities and counties add their own local sales tax on top of that. Depending on where you shop in South Dakota, your total sales tax can range from 4.2 percent to 7.5 percent.
Property tax in South Dakota is assessed by county and municipality. The rate you pay depends on where your property sits. Some counties have rates around 0.8 percent of assessed value; others are higher. If you own a home, farm, or commercial property in South Dakota, you will receive a property tax bill from your local assessor.
South Dakota also collects excise taxes on fuel, alcohol, and tobacco. Employers withhold payroll taxes for federal Social Security and Medicare, but not for state income tax.
How federal income tax still applies
The absence of state income tax does not reduce your federal income tax burden. You must file a federal return and pay federal tax on all income — wages, self-employment, investments, and retirement distributions — regardless of where you live or work.
If you receive Social Security, a military pension, or distributions from a retirement account, South Dakota will not tax those. But the federal government may. The IRS taxes Social Security benefits if your combined income exceeds certain thresholds. Military pensions and 401(k) withdrawals are subject to federal tax unless they fall under a specific exemption.
When you file your federal return, you will report your income to the IRS. You will not file a South Dakota state income tax return because the state does not have one.
If you work in South Dakota but live elsewhere
Your home state's tax rules explore to you, not South Dakota's. If you live in Iowa, Minnesota, or another state with income tax and work in South Dakota, you owe income tax to your home state on the wages you earn in South Dakota.
Some states have reciprocal agreements that exempt workers in neighbouring states from taxation. For example, Illinois and Iowa have a reciprocal agreement, so an Illinois resident working in Iowa does not owe Iowa income tax. South Dakota has no reciprocal agreements because it has no income tax to reciprocate.
Check your home state's tax authority website or speak with a tax preparer to confirm whether you owe tax on South Dakota wages. Your employer in South Dakota will not withhold state income tax, so you may need to make estimated tax payments to your home state or pay the balance when you file.
Self-employment and business income in South Dakota
If you are self-employed or own a business in South Dakota, you do not owe South Dakota income tax on your business profit. You do owe federal self-employment tax (Social Security and Medicare) and federal income tax on your net profit.
South Dakota does require businesses to register and obtain a sales tax permit if they sell taxable goods or services. You will collect sales tax from customers and send it to the state. You do not pay income tax on the revenue, but you do pay sales tax on business purchases in some cases, and you owe property tax if you own business property.
If you operate a business in South Dakota but live in another state, your home state may tax your business income. Consult a tax professional in your home state to understand your obligations.
Retirement income and pensions in South Dakota
South Dakota does not tax retirement income from any source. This includes 401(k) withdrawals, IRA distributions, pension payments from former employers, and military retirement pay. You can withdraw from these accounts without owing South Dakota state tax.
However, the federal government taxes most retirement income. Traditional 401(k) and IRA withdrawals are taxed as ordinary income. Roth IRA withdrawals are tax-free at the federal level if you meet the rules. Military pensions are taxed by the IRS unless you are a disabled veteran or your pension qualifies for another federal exemption.
Social Security benefits are not taxed by South Dakota. The federal government taxes Social Security only if your combined income (wages plus half your Social Security benefit) exceeds $25,000 for a single filer or $32,000 for a married couple filing jointly. Many retirees in South Dakota pay no federal tax on Social Security because their income stays below these thresholds.
Sales tax on everyday purchases
When you buy something in South Dakota, you pay the state sales tax of 4.2 percent plus any local sales tax. Groceries are exempt from sales tax in South Dakota, so you do not pay tax on food you buy at a grocery store. However, prepared food, restaurant meals, and food bought at convenience stores are taxable.
Clothing is taxable in South Dakota. Prescription medications are exempt, but over-the-counter drugs and vitamins are taxable. Services like haircuts, car repairs, and plumbing are generally not subject to sales tax, though some specific services may be.
If you buy something online from a retailer that has a physical presence in South Dakota or meets the state's sales tax threshold, you owe South Dakota sales tax. If the retailer does not collect it, you may owe it when you file your federal return, though enforcement is limited for individual purchases.
Moving to South Dakota for tax reasons
Some people move to South Dakota specifically to avoid state income tax. This is legal. However, moving to South Dakota does not automatically change your tax residency. Most states determine residency based on where you spend the most time, where you own a home, where you have a driver's license, and where your family lives.
If you move to South Dakota but maintain a home in another state, spend significant time there, or keep your driver's license there, your former state may claim you are still a resident and tax your income. You may need to file returns in both states and claim a credit in one for taxes paid to the other.
If you are considering a move for tax purposes, consult a tax professional in both your current state and South Dakota. They can review your specific situation and tell you whether the move will actually reduce your tax burden.
Frequently Asked Questions
Do I have to file a South Dakota state tax return?
No. South Dakota has no state income tax, so there is no state return to file. You file only your federal return with the IRS. If you are self-employed, you still file federal self-employment tax forms.
What if I work in South Dakota but my employer is in another state?
You owe income tax to your home state, not South Dakota. Your employer should withhold tax for your home state. If they do not, contact your home state's tax authority to understand your obligations and whether you need to make estimated payments.
Are Social Security benefits taxed in South Dakota?
South Dakota does not tax Social Security. The federal government may tax it if your combined income exceeds certain thresholds. For 2024, single filers with combined income over $25,000 may owe federal tax on part of their benefits.
Is there a local income tax in South Dakota cities?
No. South Dakota has no state income tax and no city income tax. Cities and counties collect revenue through property tax and sales tax.
Do I owe South Dakota tax if I own property there but do not live there?
You do not owe South Dakota income tax. You do owe property tax to the county and municipality where the property is located. Property tax bills are sent to the property owner regardless of where they live.