Sole proprietors pay their business taxes as part of their personal income tax returns, so they must pay attention to tax rates on individuals.  One major factor in looking for the best state for a sole proprietor business is whether there is a state income tax and how high it is. Eight states have no tax on earned income, while at the other end of the tax spectrum are states with income tax rates as high as 13.3% (California), 10.9% (New York), and New Jersey (10.75%).