An LLC is a business structure designed to provide limited liability protection and tax benefits to owners – often small businesses – while giving them the organizational advantages of corporations. Hence, they have become popular for entrepreneurs and established businesses due to their simplicity, flexibility, and scalability.
Knowing the different income taxes, payroll taxes, sales taxes, and other taxes that Illinois LLCs pay is essential to prevent noncompliance with the law. Having a good grasp of taxes helps you better manage your money and make informed financial decisions.
This blog covers the basics you should know about Illinois LLC filing requirements.
Limited Liability Companies (LLCs) do not pay taxes on their profits. Instead, LLC members are responsible for reporting the financial activity of the LLC on their personal 1040 income tax return.
Due to the LLC pass-through taxation, they can pay income taxes on any profits the business earns. Pass-through taxation is a tax system that transfers the responsibility for tax information from the LLC to its members.
There are several benefits to pass-through taxation in Illinois, including:
- Lower taxes for LLC owners, as they may take advantage of lower individual income tax rates than corporate tax rates;
- Simplified tax filing process for LLC owners;
- Protection for LLC owners' assets from creditors.
If you have a pass-through LLC (partnerships or sole proprietorships), you will generally report your share of the LLC's income on Schedule C of your Form 1040. If you have a C corporation LLC, you will generally report your share of the LLC's dividends on Schedule B of your Form 1040.
Each member of a limited liability company needs to pay 12.4% of the LLC's profits for Self-Employment taxes, in addition to 2.9% for Medicare. Furthermore, they must pay the flat rate Illinois State Income Tax, 4.95%.
See the Illinois Department of Revenue for more information on the Illinois LLC tax rate.
Illinois LLCs are typically subject to taxation by the Internal Revenue Service (IRS) and the Illinois Department of Revenue based on the number of LLC members. The state-level taxation by the Illinois Department of Revenue mirrors the taxation at the federal level.
If an LLC has one owner, it will be automatically taxed as a Sole Proprietorship. However, if the LLC has two or more members, it will be taxed as a Partnership by default. LLCs can file an additional form to request a different "elective status". If granted, the LLC will be treated by the IRS as a Corporation (S-Corporation or C-Corporation) instead.
Single-Member LLC Taxes (Default Status)
The IRS considers all Single-Member LLCs as disregarded entities regarding taxes. This means an LLC does not need to file a federal income tax return as an individual entity.
Instead, the owner of the Single-Member LLC must file their return and pay the federal income taxes. This can be a disadvantage if the owner's income is already high, as it could push them into a higher tax bracket
How an Illinois limited liability company pays federal income taxes will depend on the owner: if an individual owns the LLC, it will be taxed like a Sole Proprietorship. If another company owns it, it will be treated as a branch/division of the parent company.
Multi-Member LLC Taxes (Default Status)
An LLC with two or more owners will be taxed like a Partnership. In this case, a 1065 Partnership Return must be filed, and a Schedule K-1 is necessary for informing the LLC's owners of their distributive share of profits. The income reported on the K-1 will then be declared on the owners' income tax returns (Form 1040) as a part of their taxes.
Please note: If a multi-member LLC makes distributions to its members that are greater than their basis in their shares, the members may be subject to double taxation. This is because the distributions will be taxed as dividends at the individual level, and the members will also have to pay taxes on the income earned by the LLC before the distributions are made.
Husband and Wife LLC Taxes
In some states, a husband and wife LLC can file taxes as a Single-Member LLC, a Qualified Joint Venture, instead of a Multi-Member LLC. In these cases, the LLC will be treated as a disregarded entity for tax purposes.
This means that the income and losses of the LLC will be passed through to the husband and wife on their tax returns. This can be beneficial for tax purposes, as it can allow the husband and wife to split the income and losses of the LLC in a way that minimizes their overall tax liability.
Unfortunately, this option is not available in Illinois, as this state is not a community property state.
Electing to Have Your LLC Taxed as a Corporation
If an LLC chooses to be taxed like a corporation, they have two options; an S corporation or a C corporation. We recommend consulting with an accountant before making this decision.
For example, if you are a new business owner, it is recommended that you wait until your business is established and has consistent revenue before making the tax election to have your LLC taxed as an S Corporation. Once your LLC generates an average of $70,000 in net income per member per year, you should consult your accountant to discuss the possible tax benefits of this option.
LLC Taxed as an S-Corporation (Elective Status)
If you want to save money on self-employment taxes, your LLC in Illinois can file Form 2553 with the IRS and request to be taxed as an S-Corp. This method of taxation can be financially beneficial for businesses that have already established a steady profit.
For example, S corporations are eligible for the Qualified Business Income (QBI) deduction. This deduction allows businesses to deduct up to 20% of their qualified business income from their federal income taxes. In Illinois, the QBI deduction is capped at $50,000 for taxpayers with taxable income of $157,500 or less or $100,000 for taxpayers with taxable income of more than $157,500.
LLC Taxed as a C-Corporation (Elective Status)
Filing Form 8832 with the IRS allows an LLC to be taxed as a C-Corp, which could provide substantial savings for larger businesses through healthcare fringe benefits such as 401(k) plans and profit-sharing plans.
C corporations can also defer taxation on their income by reinvesting it in the business. This can be advantageous for growing companies, as it allows them to use their earnings to finance growth without paying taxes on those earnings.
The government imposes state taxes on individuals, businesses, and properties to raise revenue and fund various programs such as education, healthcare, and transportation.
Illinois State Income Tax
Illinois business owners must incorporate the state's flat tax rate of 4.95% in their tax returns for any earnings paid to themselves. Salaried employees also have to pay their respective state income taxes.
Of course, all employees (including owners) can take advantage of standard deductions and allowances:
- Exemptions: Standard deduction, personal exemption, and dependent exemption;
- Deductions: Mortgage interest deduction, property tax deduction, and charitable deduction;
- Credits: Earned income, child tax, and dependent care credit.
Illinois Sales Tax
If you're selling products to customers in Illinois, you'll need to obtain a Sales & Use Tax license from the Illinois Department of Revenue (IDOR). The license gives you the authority to collect sales tax on items you're selling. It may sometimes be referred to as a seller's permit, wholesale license, reseller permit, sales tax permit/license, or resale license.
Businesses that sell goods or services in Illinois must collect sales tax from their customers and pay sales tax to the Illinois Department of Revenue. The current sales tax rate in Illinois is 6.25%. A few exceptions exist to the Illinois sales tax, for example, groceries and prescription drugs.
Illinois Franchise Tax
Illinois franchise tax was repealed in 2020 but won't take effect until December 31, 2025. Until then, businesses must continue paying the tax, with the amount changing until the repeal is completed. The tax is based on the company's total net worth and is imposed on top of the regular corporate income tax.
For the 2023 filing year, franchise businesses in Illinois must pay a franchise tax of 0.1% of their paid-in capital, up to a maximum of $1 million. However, there is a $100,000 exemption, meaning the minimum franchise tax amount is $25.
Personal Property Replacement Tax
Personal Property Replacement Tax (PPR) is a tax imposed on the replacement value of personal property in Illinois and applies to corporations, subchapter S corporations, partnerships, and trusts with a net Illinois income of at least $250,000.
The tax rate is 2.5% for corporations and 1.5% for partnerships, trusts, and S corporations. The basis for PPR is the cost to replace the personal property, less any depreciation that has been taken on the property. This is necessary to ensure that the taxpayer is taxed on the current value of their personal property.
Local Illinois Taxes
Local taxes in Illinois are taxes that local governments levy, such as cities, counties, and school districts. These taxes fund various local services, such as education, police, and fire protection. Your LLC must collect the 6.25% Illinois state sales tax and any local taxes from areas where you sell.
Take Chicago, for example; they have a 4% local sales tax in addition to the Illinois state sales tax. As a business, your LLC is responsible for collecting and submitting relevant local and state sales taxes accordingly.
Industry taxes are taxes that are levied on specific industries or businesses. They are typically designed to raise government revenue or regulate an industry.
The Illinois Department of Revenue has a variety of industry-specific taxes that may affect your LLC:
- Cigarette Use Taxes
- Coin-Operated Amusement Device Tax
- Dry-Cleaning License Tax
- Electricity Distribution/Invested Capital Taxes
- Electricity Excise Tax
- Energy Assistance Taxes
- Renewable Energy Taxes
- Gas Tax/Gas Use Tax
- Hotel Operators' Occupation Tax
- llinois Sports Facilities Hotel Tax
- Metropolitan Pier and Exposition Authority Hotel Tax
- Municipal Hotel Tax (Chicago)
- Parking Excise Tax
- Qualified Solid Waste Energy Facility Payments
- Telecommunications Tax
Check out the Department of Revenue for more information on Illinois Industry Taxes.
The federal government levies federal taxes to help fund services provided at the national level. These taxes include income, payroll, and corporate taxes. Federal taxes usually comprise a more significant portion of the total tax burden and apply to all states.
Federal Self-Employment Tax
Any profits taken out of the businesses by LLC members or managers are subject to self-employment tax. The Federal Insurance Contributions Act (FICA) determines this tax rate, covering Social Security, Medicare, and other benefits.
The Illinois LLC tax rate applies to all the income you withdraw from your business: currently set at 15.3%. You can deduct business expenses when determining the amount of self-employment tax owed.
If you want to reduce the self-employment taxes you pay as an LLC, you can do so by electing S Corporation status. You do this by filing Form 2553, an S Corp Election form, with the IRS.
Consult a tax advisor or accountant for further guidance on decreasing your LLC self-employment taxes.
Federal Income Tax
The federal income tax you owe on the earnings you take out of your LLC depends on your deductions, earnings, current tax bracket, and filing status. Several deductions and credits can be used to reduce a taxpayer's federal income tax liability.
Standard deductions include mortgage interest, state and local taxes, and charitable contributions. Some common credits include the child tax credit, the earned income tax credit, and the education tax credit.
The federal income tax is a complex and ever-changing area of law. Taxpayers should consult with a tax advisor to ensure they are correctly filing their taxes and taking advantage of all the deductions and credits they are eligible for.
As an employer in Illinois, you must submit payroll taxes if you have employees. This tax is calculated as a percentage of employers' salaries. Payroll taxes fund social insurance programs like Social Security, Medicare, and unemployment insurance.
Payroll tax includes:
- Federal income tax withholding
- State income tax withholding
- Social Security tax
- Medicare tax
- Federal unemployment taxes (FUTA)
- State unemployment taxes (SUTA)
- Local/county deductions
- Employee deductions
There are a few reasons why companies withhold payroll taxes. First, it ensures that the government receives the correct amount of taxes from employees. Second, it simplifies the tax filing process for employees. Third, it helps to prevent employees from underpaying their taxes.
Setting payroll, withholding taxes, and filing and submitting taxes to various state and government agencies can be burdensome and complex. Incorrect filing can lead to penalties and fines, so most LLCs hire a payroll company or accountant for help.
See the Illinois Department of Security: Unemployment Taxes & Reporting for more information.
It can be a challenge to understand Illinois LLC filing requirements. Furthermore, failing to pay taxes or meet deadlines can harm your business. Therefore, it is recommended that you enlist the assistance of a reliable accountant in Illinois to correctly fill out all your federal, state, and local taxes.
Lewis.cpa is a Chicago CPA firm with over 36 years of experience and over 4000+ happy clients. We help many LLCs maintain accurate bookkeeping while keeping their tax bill as low as possible.
Our certified personal accountants in Chicago can help organize and supervise your finances so your company can flourish. Don't leave your Illinois LLC tax for the last minute. Contact us for a hassle-free tax return experience.