The Illinois small business income tax rate is something that stresses many new business owners, more than trying to determine the business name or how to receive income. Knowing which tax rates apply to your business and in what manner is a lot to figure out. Most businesses don't make this their primary focus, but the right accountant and law firm can help the small business owner with taxes.
Illinois State Income Tax
The corporate income tax rate in Illinois is paid as a flat rate, for both domestic and foreign corporations. You pay an income tax rate of 7%, with adjustments, of the federal taxable income. When the business tax year ends, the return is due on the 15th day in the fourth month following, unless the tax year concludes at the end of June, when they only get three months. If a business's income tax year matches the calendar year, then the return is due on April 15th.
The Illinois department of revenue has also enacted an optional PTE tax until 2025. This optional pass-through-entity tax is a possible 4.95% tax on net income for partnerships, S corporations, and LLCs that get taxed as partnerships. The shareholders, LLC members, or partners of the business can get a credit for the PTE tax amount against the Illinois taxes they are responsible for. The idea behind the PTE tax is to let Illinois residents circumvent the $10,000 federal taxable income cap for small business Illinois state tax deductions on their individual income tax returns.
Later on, we'll discuss how taxes and the income tax rate apply to each kind of entity type for any business in Illinois.
Illinois Sales Tax
Do you have a business in Illinois that sells general merchandise? It doesn't matter if you have concrete stores or an online website for a business, you need to collect the Sales and Use Tax for Illinois and remit them back. Municipal taxes might also apply. Illinois has a 6.25% state sales tax rate, and many local jurisdictions in Illinois like Cook County have their own sales tax rates going up to 4.75%.
Some goods like medical appliances are exempted from sales tax. You can see what they are by visiting the website of the Illinois Department of Revenue.
Your sales tax professionals might talk to you about having a "Nexus" inside Illinois. This refers to a business having something that ties it to Illinois for the purposes of state taxes. Typically, an Illinois nexus means having a brick-and-mortar presence somewhere in the state where you sell goods or generate affiliate revenue in excess of $100,000 in the previous 12 months.
Make sure you are registered for an Illinois sales tax permit. Your business can't collect Illinois sales tax without one.
Illinois Payroll Taxes
Does your business hire Illinois taxpayers? If so, then you have to match the payroll withholding taxes of your employees along with contributions to federal and state unemployment taxes that are based on earned wages of your employees. Your employees will determine their withholding amounts by filling out IL-W-4, the withholding allowance certificate for Illinois employees.
Should your employees live in other states or do any level of work in states they don't live in, then you should know that the state of Illinois has negotiated reciprocal agreements with Iowa, Wisconsin, Kentucky, and Michigan. That gives your employees the option of withholding taxes based on their home state. Since you're a business, you must be registered with both the Department of Employment Security and the Department of Revenue for Illinois.
Need help with payroll services in Chicago? A tax professional from Lewis.cpa can do that!
Illinois Franchise Tax
Corporate business owners have to pay the Illinois state franchise tax, in addition to the corporate income tax, all while reporting personal income on tax returns. This applies to S and C corporations, as well as LLCs, but it doesn’t pass through entities. The franchise tax doesn't apply to unincorporated partnerships or sole proprietorships. It can be hard to know when this tax might apply to your business, so working with income tax professionals can help you get organized. This additional franchise tax is probably going to be phased out in the coming tax years, but it still applies to both foreign and domestic corporations that conduct business in Illinois. There are two ways to calculate and pay this tax, and your accountant can help you figure out which one works better for your business.
The Illinois department of revenue exempts many from this tax, such as legal or other business activities, including maintaining or defending settling during a proceeding. Holding internal meetings, maintaining bank accounts and securities, and single transactions finished within 120 days without repetition also count. Selling through independent contractors might also exempt some businesses in Illinois.
Illinois Replacement Tax
The Replacement Tax started on July 1, 1979. It's also known as the personal property replacement tax, and it's imposed on income from trusts, partnerships, subchapter S corporations, and corporations. This particular tax is intended to replace money local governments lost when they no longer had the power to impose their own personal property taxes. This replacement tax is collected by Illinois but then paid out to local governments.
This personal property replacement tax rate is based on the net income of a small business. Traditional corporations pay 2.5% of their net income. Other forms pay 1.5% of their net income. The due dates for this tax will vary based on the particular legal form the Illinois business takes.
Illinois Small Business Taxes for Different Entities
The Illinois small business tax rate that small businesses have to pay on their tax return can vary quite a bit based on what kind of legal entity they are.
A business in Illinois is subject to the Illinois corporation franchise tax, personal property replacement tax, and corporate income taxes.
An S corporation happens if you form a traditional corporation first and then file a specific Internal Revenue Service (IRS) form to elect for the S status. S corporations aren't typically subjected to federal income taxes on their own because taxed income gets passed through to individuals who are shareholders and they pay federal taxes on whatever share of the income they get. That makes an S corporation a pass-through entity. Illinois recognizes federal S elections, but it still requires these businesses to pay personal property replacement taxes and the annual franchise tax. Individual shareholders are also responsible for paying taxes on any income they receive thanks to the business. The personal property replacement tax is paid at 1.5% of the net income for the S corporation.
Limited Liability Companies (LLCs)
As with an S corporation, a standard LLC is a pass-through entity that doesn't have requirements about paying federal income tax. Business income is actually distributed to the various individuals who are members of the LLC. They pay taxes, both state and federal, for any amount they receive. The state of Illinois requires more than this, however, as the LLC itself must pay personal property replacement tax rated at 1.5% of its net income.
Default LLCs get classified as partnerships when filing their tax return, but many businesses in Illinois choose to classify an LLC as a corporation, which would then subject the business to the corporate income tax of the state of Illinois.
In the case of partnerships, income gets distributed to all the individuals who are partners in the business. Then, they pay money for the amount that is distributed to them. They do this for both their Illinois taxes and federal tax return. For any Illinois business, individual partners pay state taxes for the distributions they get, but partnerships must also pay for the personal property replacement tax. This rate is 1.5% of the overall net income, according to the state's tax code.
Any income that small businesses generate is distributed to you since you are the sole proprietor. Then, you are personally responsible for paying that tax that the business earns on your tax return.
Trust Your Business Taxes to a Professional CPA in Chicago
It is difficult to control all these tax issues, but we can help with various accounting services that help you minimize your tax responsibilities while also keeping you compliant with tax rules and regulations, even for pass through entities or personal income taxes. Most small businesses in Illinois don't know how to determine how to work with the department of revenue to pay their state tax. Turn to Lewis.CPA for all your income tax preparation needs.