A new study by Dancing Numbers ranks the best and worst states for freelancers based on tax burdens. California, New York, and Massachusetts top the list for the highest taxes, while Alaska, South Dakota, and New Hampshire offer the most favorable environments. With 38% of the U.S. workforce freelancing, understanding how state taxes affect your bottom line has never been more critical.
The freelance economy is reshaping how America works. From graphic designers and consultants to developers and digital marketers, millions of professionals are choosing independence over traditional employment. The numbers prove it: nearly 38% of the U.S. workforce now freelances, contributing over $1.3 trillion to the economy each year.
But with freedom comes responsibility—especially when it comes to taxes. Unlike W-2 employees, freelancers must handle everything themselves: self-employment taxes, estimated quarterly payments, expense tracking, and LLC fees. And depending on where you live, that financial juggling act can be far more difficult than you expect.
A recent study by Dancing Numbers reveals which states are the toughest—and easiest—on freelancers. Using data from the IRS, Tax Foundation, and other authoritative sources, the report ranks all 50 states based on income taxes, sales taxes, deductions, LLC filing fees, and average freelance salaries. The results? Unsurprisingly, some of the country’s most economically powerful states also come with the steepest tax burdens.
Key Takeaways
- Freelancers now make up 38% of the U.S. workforce, contributing over $1.3 trillion annually.
- California, New York, and Massachusetts have the highest freelancer tax burdens.
- Alaska, South Dakota, and New Hampshire offer the most tax-friendly environments.
- Location can dramatically affect take-home income—even for freelancers earning similar salaries.
- Proactive tax management and smart planning can help minimize liabilities, no matter your state.
- Consider relocation or restructuring your business if state taxes eat too much of your income.
Table of Contents
The Toughest States for Freelancers
Let’s start with the hard truth: if you’re freelancing in California, New York, or Massachusetts, you’re paying a premium for the privilege of working independently.
1. California: The Most Expensive State for Freelancers
California tops the list with a Freelancer Tax Burden Score of 81.94, the highest in the nation. With a 13.3% income tax (the steepest in the U.S.) and an average sales tax of nearly 9%, freelancers here are hit from all sides. On top of that, forming an LLC costs nearly $890 in the first year, and while the average freelance income sits at $97,931, the state’s standard deduction covers just 13.75% of that income.
“California’s tax structure hits freelancers from multiple angles,” says Punit K. Jindal, Founder of Dancing Numbers. “High income tax, elevated sales tax, and expensive business registration create a perfect storm of costs that eat into profits.”
For independent professionals in the Golden State, the lesson is clear: meticulous planning is essential. You can thrive in California—but only if you treat your freelance business like a full-fledged company.
Actionable Tips for California Freelancers:
- Budget for taxes monthly. Set aside at least 25–30% of your income to avoid surprises during quarterly payments.
- Deduct everything legitimately possible. Track your home office, equipment, mileage, and internet use—small deductions add up.
- Consider forming an S-Corp. Depending on income level, this can reduce your self-employment tax burden.
- Consult a tax professional early. California tax codes are complex; expert guidance can save thousands over time.
2. New York: High Earnings, Higher Taxes
New York ranks second, with a 10.9% top income tax rate and a combined state and local sales tax of 8.54%. Freelancers earn the nation’s highest average salary—$108,561—but those gains are quickly consumed by taxes and fees.
LLC formation fees are lower at $209, yet the state’s progressive tax structure means the more you earn, the more aggressive your tax bill becomes. Freelancers who thrive in New York often do so because of networking and opportunity—but they pay a premium for access to that market.
Actionable Tips for New York Freelancers:
- Use city-specific deductions. New York City’s Unincorporated Business Tax (UBT) applies to many freelancers; understand how to offset it.
- Track business expenses daily. Use tools like QuickBooks or Dancing Numbers to automate recordkeeping.
- Consider nearby states. With remote work, living in New Jersey or Pennsylvania (with lower taxes) while contracting in New York can make financial sense.
- Leverage local business programs. New York’s Freelancers Union and city grants can help offset costs for self-employed workers.
3. Massachusetts: High Pay, High Costs
Massachusetts takes the third spot with a 9% income tax rate and $1,000 in LLC formation fees, the highest among the top states. Freelancers make an impressive $108,372 on average, but the state’s deductions only cover 12.88% of income, leaving most earnings exposed to taxation.
Still, Massachusetts attracts freelancers in fields like healthcare, education, and tech for its thriving innovation economy. For those earning well, the cost may be worth it—if you manage your business smartly.
Actionable Tips for Massachusetts Freelancers:
- Max out retirement contributions. SEP IRAs and Solo 401(k)s can reduce taxable income.
- Pay quarterly taxes on time. Late fees in Massachusetts compound quickly.
- Formally separate business finances. Use a dedicated business checking account and accounting software.
- Keep meticulous mileage and expense logs. The state audits freelancers more frequently than wage earners.
Other High-Tax States for Freelancers
Beyond the top three, Minnesota, Maryland, Illinois, Georgia, Kansas, Connecticut, and Utah round out the top ten. While each has unique tax structures, they share one common trait: high-income freelancers lose a significant share to state and local taxes.
If you’re in one of these states, remember that higher taxes don’t have to mean lower profits. Strategic business management—combined with careful financial planning—can make even expensive states workable for freelancers.
Table 1: Top 10 States Where Freelancers Pay the Highest Taxes
| Rank | State | Freelancer Tax Burden Score | Key Factors |
|---|---|---|---|
| 1 | California | 81.94 | 13.3% income tax, 8.98% sales tax, $890 LLC fees |
| 2 | New York | 75.21 | 10.9% income tax, 8.54% sales tax, high city surcharges |
| 3 | Massachusetts | 72.31 | 9% income tax, $1,000 LLC fees |
| 4 | Minnesota | 69.10 | 9.85% top income tax, moderate sales tax |
| 5 | Maryland | 68.51 | 8.25% income tax, 6% sales tax |
| 6 | Illinois | 67.93 | 4.95% flat tax, 8.82% sales tax |
| 7 | Georgia | 65.30 | 5.75% income tax, 7.39% sales tax |
| 8 | Kansas | 65.01 | 5.7% income tax, 8.66% sales tax |
| 9 | Connecticut | 63.57 | 6.99% income tax, $120 annual LLC fee |
| 10 | Utah | 63.29 | 4.65% flat tax, 7.19% sales tax |
The Best States for Freelancers
On the other end of the spectrum, a handful of states stand out for offering tax-friendly environments. For freelancers tired of high tax bills, these could be ideal places to base your operations—especially in the age of remote work.
1. Alaska: The Freelancer’s Paradise
Alaska ranks as the most favorable state for freelancers, with a Freelancer Tax Burden Score of 22.46. It has no state income tax, no state-level tax burden, and an average sales tax of only 1.82%. Freelancers there earn an average of $106,866, and their standard deduction covers 19% of income—among the highest nationwide.
“Alaska proves that tax-friendly policies can coexist with strong freelance earnings,” says Jindal. “Without state income tax, freelancers retain more capital to reinvest in their businesses.”
Actionable Tips for Freelancers in Low-Tax States:
- Use the savings strategically. Redirect what you save from taxes into business growth, marketing, or an emergency fund.
- Invest in professional development. Courses, certifications, and new tools are all deductible and boost competitiveness.
- Keep compliant with federal taxes. Even with state tax relief, you’re still responsible for self-employment and federal obligations.
- Plan for health insurance. Low-tax states may have fewer public health subsidies, so build this into your financial planning.
2. South Dakota: Simple, Low, and Stable
With no income tax, minimal LLC fees ($205), and average freelance income of $99,230, South Dakota is one of the easiest places to build a sustainable freelance business. The state’s sales tax of 6.11% is modest compared to high-tax states, and its standard deduction covers nearly 20% of income.
For freelancers seeking peace of mind and predictability, South Dakota’s stable business climate is a strong draw.
3. New Hampshire: Dual Zero Taxes
New Hampshire offers freelancers a rare combination—no income tax and no sales tax. Freelancers earn around $96,502 annually and pay just $200 in LLC fees to get started. For remote workers who want simplicity, it’s hard to beat.
“New Hampshire’s dual zero-tax policy eliminates two major tax categories that typically burden freelancers elsewhere,” says Jindal. “It’s an ideal state for independent professionals seeking to maximize take-home pay.”
Rounding Out the Top Ten
Other low-tax states include Wyoming, North Dakota, Mississippi, New Mexico, Arizona, Ohio, and Nevada. Many share one key feature: low or nonexistent state income tax combined with modest sales tax rates. These regions are increasingly attracting mobile freelancers who value cost efficiency over proximity to big cities.
Table 2: Top 10 States Where Freelancers Pay the Lowest Taxes
| Rank | State | Freelancer Tax Burden Score | Key Factors |
|---|---|---|---|
| 1 | Alaska | 22.46 | 0% income tax, 1.82% sales tax |
| 2 | South Dakota | 24.20 | 0% income tax, 6.11% sales tax |
| 3 | New Hampshire | 27.40 | 0% income tax, 0% sales tax |
| 4 | Wyoming | 27.41 | 0% income tax, 4% sales tax |
| 5 | North Dakota | 30.31 | 2.9% income tax, 6.9% sales tax |
| 6 | Mississippi | 30.61 | 5% income tax, 7.07% sales tax |
| 7 | New Mexico | 35.27 | 5.9% income tax, 7.98% sales tax |
| 8 | Arizona | 36.14 | 4.5% income tax, 8.4% sales tax |
| 9 | Ohio | 36.70 | 3.99% income tax, 7.2% sales tax |
| 10 | Nevada | 37.61 | 0% income tax, 8.23% sales tax |
What the Rankings Really Mean for Freelancers
Taxes might seem like a dry topic, but they play a crucial role in your ability to thrive as a freelancer. Jindal sums it up well:
“High-tax states take a larger share of income and push freelancers into defensive financial planning. In contrast, low-tax states give freelancers breathing room to reinvest and grow.”
The research underscores an important reality: where you live matters as much as what you earn. For instance, a New York freelancer making $108,000 may take home less than an Alaskan freelancer earning $107,000 after taxes.
With remote work on the rise, many independent professionals are now factoring tax environments into their residency decisions—a form of “geoarbitrage” that can dramatically increase net income.
Table 3: The Tax Gap in Action
| State | Average Freelance Income | Effective State + Local Tax Burden | Net Take-Home (Approx.) |
|---|---|---|---|
| California | $97,931 | 22% | $76,385 |
| New York | $108,561 | 21% | $85,763 |
| Massachusetts | $108,372 | 19% | $87,785 |
| Alaska | $106,866 | 8% | $98,316 |
| South Dakota | $99,230 | 9% | $90,300 |
| New Hampshire | $96,502 | 8% | $88,782 |
Actionable Strategies to Minimize Your Freelance Tax Burden
No matter where you live, smart planning can help you keep more of what you earn. Here are practical steps freelancers can take today:
1. Separate Business and Personal Finances
Open a dedicated business bank account. Mixing expenses makes tax filing—and audits—harder. Keep your records clean from day one.
2. Track Deductions in Real Time
Use apps like QuickBooks, Everlance, or Dancing Numbers to log expenses as they occur. You’ll never scramble at tax season to remember what’s deductible.
3. Automate Quarterly Tax Payments
The IRS expects quarterly payments from freelancers. Use an estimated tax calculator to stay on schedule and avoid penalties.
4. Consider Your Business Structure
An LLC or S-Corp can offer liability protection and potential tax savings, especially once your income grows. Consult a CPA before deciding.
5. Build a Tax Reserve Fund
Set aside 25–30% of every payment you receive. Keep it in a high-yield savings account to earn interest until tax time.
6. Work with a Specialist
Freelance tax situations are complex. Hiring a professional who understands self-employment can uncover deductions you might overlook.
7. Leverage Retirement Accounts
Contribute to a SEP IRA or Solo 401(k)—these not only secure your future but also lower your taxable income today.
8. Move Strategically (If You Can)
Remote work gives freelancers unprecedented flexibility. If your tax bill feels overwhelming, consider relocating to a state that better aligns with your financial goals.
The Bigger Picture: Freelancing and Financial Independence
The freelance revolution isn’t just a trend—it’s a structural shift in how Americans work. However, the data makes one thing clear: taxes are a major factor in whether freelancers succeed or struggle.
Freelancers who treat their work like a business—tracking income, managing deductions, and understanding local tax implications—are the ones who thrive long-term.
As Jindal concludes, “The difference between scaling your business and treading water often comes down to how well you plan for taxes.”
Whether you’re freelancing in bustling New York City or the quiet expanses of Alaska, financial literacy remains your strongest tool for building a sustainable, profitable, and independent career.
FAQ
Why do freelancers pay more taxes than traditional employees?
Freelancers are responsible for both the employer and employee portions of Social Security and Medicare taxes, known collectively as the self-employment tax (about 15.3%). Traditional employees split this cost with their employer. Freelancers must also handle quarterly payments and business registration fees on their own.
What can freelancers do to legally reduce their tax burden?
Freelancers can maximize deductions for home offices, business equipment, software, internet, travel, and continuing education. Setting up a retirement account like a SEP IRA or Solo 401(k) also lowers taxable income. Consulting a CPA familiar with self-employment tax law ensures full compliance while optimizing deductions.
Are there any states with no income tax for freelancers?
Yes. States like Alaska, South Dakota, Florida, Wyoming, Texas, and Nevada have no state income tax, making them particularly appealing to freelancers. However, consider factors like cost of living and client access before relocating purely for tax savings.
How can freelancers manage tax season more efficiently?
The key is organization. Use digital tools to log income and expenses as they happen, automate quarterly payments, and store receipts in the cloud. Partnering with a tax professional before year-end—not after—ensures strategic planning instead of reactive filing.
Is it worth moving to a low-tax state as a freelancer?
For many remote professionals, yes. Moving to a state with little or no income tax can significantly increase take-home pay. However, you should weigh tax savings against lifestyle preferences, client proximity, and living costs. The best decision balances financial efficiency with personal well-being.
