Layers are certainly not bad, if it's useful to your workflow of course use layers.  They don't make any difference at all to the final flattened image, so not sure why anyone would consider them bad. 

Looks great so far.  (Would personally make sure each segment of the background graphic is symmetrical.  I don't know why, but something as precise as pixels really highlights anything weird on geometric stuff.  I'm sure a normal human would not notice so feel free to ignore). 

As for the palette, the very saturated dark crimson shadow is quite a departure from the original and the whole piece is kind of a lot warmer and more vibrant.  Which is fine, nothing wrong with it, I generally use similar colours too.  You definitely lose the big hue contrast though in this piece though.  You're also adding competing shapes in the background by breaking the flag into 3 distinct clusters.  So in effect a red shape ontop of 3 red shapes, rather than a blue shape ontop of a red shape.  (Obviously a lot more subtle than I've described it, but something to consider!) 

Yeah! It is indeed short, but not to it's detriment. It feels like a distilled version of Cave Story, without the running errands back-and-forth (though even Cave Story becomes quite linear after the first couple of zones). Anyway, I got some quality time out of it, regardless of expectations.

There are some secrets!
Spoiler

Did you get to the replay as yellow frog with all the weapons and jetpack?
After the credits have rolled, press the shoot or jump buttons (4 presses I think was sufficient)
(I don't know if there are any special prerequisites for this to happen, such as having upgraded all the weapons or something like that)
A guy shows up (weapon salesman?) and asks if you were satisfied with the playthrough
Pick "no" and you get sent back to the beginning of the game as the yellow frog

Having all the equipment from the start gives you access to some hidden areas
Game continues after the spot where the last boss should've been

Though I have a feeling there's more that I haven't found yet.

I did get to that, yes! I assumed everyone got that, didn't realise you had to do something particular for it. 

Spoiler

I think using 3d is possibly best.  Or going with an easier to math grid.  (22.5 degree angles!) 

Otherwise you get arbitrary things like working out your tile height by rotating 45 degrees and squishing vertically till you get the right angle (works out as 70.05%).  Then using half that total height for the heights of your regular tiles before skewing them. 



Bit messy? 

Think this is a fairly common problem - working on individual assets in isolation, as if they're totally separate things.  Anyway, Cyangmou pretty much gave every suggestion about that, so I don't have anything useful to add, but yes - full mockup.  Would similarly only use references with context for this sort of thing.