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Illinois Business Tax – Complete Guide
Each state in the USA has their own strategic advantages for new and existing businesses like pro-business regulations and climate. Illinois is considered one of the top states with a growing economy and an innovation driven market. Once you form a company in Illinois there are certain state requirements that you will need to fulfill. One of the important requirements is that of filing Illinois business tax. Different types of entity structures have different tax structures and requirements on the federal and state level. This can be quite perplexing. Hence, we have created this guide. It will help you to identify your tax liabilities in this state. You will also learn about tax rates and use an Illinois business tax Calculator to file taxes in the state.
Illinois Business Tax
The state of Illinois is a business friendly state and like all other states, also requires new and existing entities to file taxes. You may be required to file Illinois business tax at the state level and local level. Depending on the type of entity you form, federal taxes may be required to be filed. The type of taxes that you may need to file may also depend on certain other factors like business activity and number of employees. Each type of state or local tax has different rates. Hence, it is important to use an Illinois business tax calculator to determine the exact tax amount. If you are moving your company through foreign qualification then you will be required to file state business taxes in the state of formation (home state) as well as Illinois.
What taxes do businesses pay in Illinois?
Illinois is a business friendly state and home to several Fortune 500 companies. Some of the largest multinational companies based in this state include Boeing, Walgreens Boots Alliance, Caterpillar, United Parcel Service (UPS), Baxter International, Hyatt Hotels, Aon, Northern Trust, and CNA Financial among others. There are several key industries in this state right from pharmaceutical and drugs to cosmetic & toiletry, life sciences, Casualty and Direct Insurance, transportation, distribution, and logistics, and commercial banking among others. The industry also plays a key role in determining the type of small business tax in Illinois that may be applicable.
The state also offers several tax incentives or credit programs. This will help greatly in minimizing your overall tax burden. The most common form of Illinois LLC taxes or business taxes applicable in the state are:
Illinois business income tax
There are two types of income tax prevalent in the state of Illinois. One is a personal or individual income tax, and the other is a small business tax, also known as the state business income tax. The tax rate is a flat 7 percent of your federal taxable income, along with adjustments. The tax returns are due on the 15th day of the fourth month after the end of an entity. This is one of the important Illinois corporation taxes.
Example: If your company’s tax year ends on September 30, then returns will be due on the 15th day of the third month, December 15.
Illinois pass-through entity tax
An important Illinois business tax is the Pass-through Entity (PTE) tax. This is considered an entity-level income tax. The PTE tax rate is 4.95 percent (.0495) of the taxpayer’s net income during a taxable year. S corporations and partnerships can elect this tax. This tax will be paid on all Illinois net income post allocation or apportionment.
Illinois personal property replacement tax
Personal property replacement taxes (PPRT) are an essential source of revenue for the state. It is collected by the Illinois state and paid to the local governments. The PPRT tax is governed by the 2024 Illinois Compiled Statutes, Chapter 30 – Finance, 30 ILCS 115/ – State Revenue Sharing Act – (30 ILCS 115/12) (from Ch. 85, par. 616). It is an essential form of Illinois Corporation taxes where the rate can vary from 1.5 to 2.5 percent depending on the entity type.
Illinois sales and use tax
One of the important forms of Illinois corporate income tax is the sales and use tax. The sales and use tax is imposed on different business activities connected to selling products and services. The most important component of the sales tax act is known as the Retailers’ Occupation Tax Act. This act imposes sales tax upon individuals or businesses that are engaged in selling tangible personal property through retail to vendors or purchasers for use or consumption.
On the other hand, the Use Tax Act imposes a tax on individuals or businesses for getting the privilege of using tangible personal property in this state where such property has been purchased anywhere at retail from a retailer. The sales tax is one of the important Illinois LLC taxes. It combines all state, local, home rule occupation and use, mass transit, park district, non-home rule occupation and use, county school facility tax, county public safety and facilities, and business district taxes. This tax applies to Illinois (in-state) retailers, out-of-state sellers, remote retailers, marketplace sellers, and marketplace facilitators.
Illinois withholding tax
The employer withholding tax is an important form of Illinois business tax. The application of this tax is governed by the 2024 Illinois Compiled Statutes, Chapter 35 – Revenue, 35 ILCS 5/ – Illinois Income Tax Act., Article 7 – Withholding Tax. According to this law, every employer who maintains an office or is transacting their business within this state is required under the provisions of the Internal Revenue Code to withhold a tax on any form of compensation paid in this state to an individual according to Section 304(a)(2)(B)). If you are paying wages and salaries, you must first register with MyTax Illinois. The tax rate for withholding is 4.95 percent, effective July 1, 2017. You can use an Illinois business tax calculator to determine your withholding tax rates.
Illinois individual income tax
There are certain types of entities that have to file one or more small business tax in Illinois. In some forms of entities, the owners of such businesses have to file individual income tax returns. This tax applies to individuals, estates, and trusts. A flat income tax rate of 4.95 percent of the net income. If it is applicable, then you will need to file Form IL-1040. You can file it electronically using MyTax Illinois. You can file this return using your Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN).
Are you thinking of starting a new business in Illinois?
How Illinois Businesses are Taxed?
Suppose you have decided to form and operate a new company in Illinois, and then you must maintain compliance with all important state requirements. One such requirement is filing Illinois business tax returns. The state has different types of taxes; one entity may be required to file multiple taxes. The type of taxes that will apply to your business will depend on the entity structure, business activity, and even location. You may need to file multiple Illinois LLC taxes if you form a limited liability company. Let us examine the various entities and their tax obligations in this state.
Taxes for an LLC
If you plan to form a limited liability company in Illinois, then it will be considered a pass-through entity for taxation purposes. Such an entity will not be required to file any federal or Illinois corporate income tax. This being said, the income earned by an LLC will always pass through to the owners and other members. As a result, you or the members will be required to file personal income tax at a flat rate of 4.95 percent. However, suppose a limited liability company is considered a disregarded entity for federal income tax purposes. The income, deductions, and other relevant items must be reported on the owner’s federal income tax return.
One of the important Illinois LLC taxes is the self-employment tax. Each member has to pay self-employment taxes on their share of the company’s profits, which includes 12.4% for Social Security and 2.9% for Medicare. Depending on the business activity in Illinois, your company may also be required to file sales and use tax. If you have hired employees or are paying wages and salaries, then filing state employer taxes becomes necessary.
Taxes for a C Corporation
If you are thinking of incorporating in Illinois then your company will be subjected to different types of taxes. One of the foremost amongst them is the Illinois corporate income tax. The current tax rate is a flat 9.5 percent. Apart from this, corporations are also charged a franchise tax. This is quite a complex tax and will require you to use an Illinois business tax calculator. Apart from this, a corporation may be subjected to Replacement Tax, which is also known as the Personal Property Replacement Tax (PPRT). Corporations will have to pay a replacement tax of 2.5 percent on their net income in this state. You can file this tax using Form IL-1120.
Apart from these, a C Corporation may also be subjected to Sales & Use Tax, Employer Withholding tax, and other local taxes.
Taxes for S Corporation
An S Corporation is not exactly an entity structure but is a type of tax election. You will actually need to register some form of entity prior to opting for this election. The most common form of companies that elect S Corporation tax status are C Corporations and Limited Liability Companies (LLC’s). Once your company gets the S Corporation status, the Illinois corporate income tax liabilities will also change. The most important feature is that of pass-through taxation and due to this, an S corp will not file any federal income taxes at the company level. Instead, the profit and loss will be “passed through” to company shareholders and they will need to file individual tax returns.
In the state of Illinois, Subchapter S corporations will be required to pay replacement tax at the rae of 1.5 percent. There is also the Pass-through entity (PTE) tax. You can elect to file this tax that is effective for tax years that end on or post December 31, 2021, and beginning before January 1, 2026. One of the important Illinois Corporation taxes is the sales & use tax. You will need to file this tax only if your business activity revolves around retail sales.
Taxes for a Sole Proprietorship
A sole proprietorship is one of the easiest forms of business that you can operate in the state of Illinois. Since it is owned and operated by a single owner hence the most important small business tax in Illinois for a sole proprietorship is individual income tax return (Form IL-1040). You will have to file this return at a flat rate of 4.95 percent irrespective of your earnings. Apart from this, depending on the business activity, sole proprietors may also be required to file sales and use tax returns.
Taxes for Partnerships
The income generated from a partnership firm is normally distributed to the individual partners. These partners pay tax on this distributed amount through their federal as well as state tax returns. One of the Illinois Corporation taxes that partnerships are required to file is the personal property replacement tax. The applicable tax rate for this type of entity is 1.5 percent of its net income. Partnerships can also elect to file Pass-through entity (PTE) tax at a rate of 4.95 percent. If the business activity of a partnership involves retail sales then sales and use tax will also be applicable.
Ready to Incorporate Your Illinois Company?
You can register several types of entity structures in Illinois right from a Partnership to an LLC or C Corporation. You can even elect S Corporation tax status to enjoy certain tax privileges. The process for new company formation and the applicable taxes will vary according to the chosen structure. IncParadise, one of the state’s top incorporation service providers, can provide information about Illinois’s small business tax. We can help you register your LLC or corporation in this state.
Once you have formed a new business, there are several important annual requirements that every business needs to be compliant with like business licensing and annual reports. Hence, IncParadise offers additional services to fulfill several requirements like EIN filing and filing DBA among others.