For small business owners in Illinois, it’s essential to know the state's tax system. This guide covers Illinois small business tax — from choosing your business structure to managing income tax, sales tax, employment taxes, and property taxes.
Illinois Business Landscape Overview
In Illinois, small businesses are important contributors to the economy. According to the Illinois Small Business Profile, the state has 1.2 million small businesses, representing 99.6% of all business entities. This segment provides jobs to 2.5 million people, or 44.7% of the workforce in Illinois.
Between March 2021 and March 2022, the state saw 42,623 new establishments open and 34,497 businesses close, for a net gain of 8,126 establishments. Most of this activity came from small businesses.
While 59,543 establishments experienced employment growth, there was a contraction in 80,019 establishments. As a result, there was modest net job growth since 2023 within the small business sector.
What Kind of Business Taxes Must Be Paid in Illinois?
Small businesses in Illinois may pay various taxes depending on their structure, location, and activities:
- State income tax: Illinois imposes a state income tax on individuals and businesses, depending on the legal structure.
- Sales and use tax: Businesses selling tangible goods or certain services must collect and remit sales tax. Use tax may apply to out-of-state purchases.
- Employment taxes: Businesses with employees must withhold state income tax from wages and pay state unemployment insurance tax (SUI).
- Property tax: Businesses owning real or personal property in Illinois are subject to property taxes, which vary by location.
- Franchise tax: Illinois imposes a franchise tax on corporations based on paid-in capital, in addition to state income tax.
- Miscellaneous taxes: Other taxes may apply, such as the Retailer's Occupation Tax for retail businesses.
Illinois Business Tax Rates Overview
Illinois Business Income Tax
If you own a corporation or an LLC with a C corp tax election in Illinois, you're subject to the Illinois business income tax, also known as corporate income tax.
- Illinois applies a dual tax structure — 7% corporate income tax plus 2.5% Personal Property Replacement Tax (PPRT), resulting in a combined effective rate of 9.5% for C corporations — the third-highest in the US.
- This rate applies to both domestic and foreign corporations.
- The tax is calculated based on adjustments to federal taxable income.
- The deadline for corporate income tax returns varies based on the business's fiscal year-end. Generally, it's the 15th day in the fourth month following the fiscal year-end. For businesses with fiscal years ending in June, the deadline is three months after the fiscal year end. For businesses on a calendar year, the deadline is April 15th.
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Optional Pass-Through Entity (PTE) Tax
- Illinois offers a permanent optional PTE tax. In December 2025, the Illinois legislature removed the sunset clause, making the PTE tax permanent with no expiration date.
- PTE tax is 4.95% on net income for partnerships, S corporations, and LLCs taxed as partnerships.
- Shareholders, LLC members, or partners can use the PTE tax credit to offset their individual Illinois taxes.
- The PTE tax helps Illinois residents bypass the $10,000 federal taxable income cap for state tax deductions on small business income.
Illinois Sales and Use Tax
If you operate a business in Illinois that involves the sale of general merchandise, whether through physical stores or online platforms, it's important to comply with the state's Sales and Use Tax regulations.
Illinois enforces sales tax on tangible personal property and certain services sold within the state. Use tax is applied to items where sales tax wasn't originally charged. This applies, for example, when a business uses items from its sales inventory for its own purposes.
The standard rate for general merchandise in Illinois is 6.25%. However, there is a reduced rate of 1% for qualifying food, drugs, and medical appliances. Local jurisdictions may impose their own taxes on top of the state rate. These local tax rates change twice a year, on January 1 and July 1.
To find the specific tax rates for your location, use the Illinois Department of Revenue's Tax Rate Finder.
Sales Tax Nexus
Nexus refers to a business's connection to Illinois for tax purposes. Generally, nexus means having a physical presence, such as a brick-and-mortar store, or generating revenue exceeding $100,000 from Illinois customers in the previous 12 months.
Important update effective January 1, 2026: Illinois eliminated the 200-transaction threshold for economic nexus. Going forward, nexus is determined solely by the $100,000 annual gross receipts threshold. Businesses that previously avoided registration due to low transaction volumes but high-value sales must now register to collect and remit Illinois sales tax.
Ensure your business is registered for an Illinois sales tax permit. Without one, your business cannot legally collect Illinois sales tax.
Illinois Payroll Taxes
If your business hires Illinois taxpayers, you must match payroll withholding taxes and contribute to federal and state unemployment taxes based on employee wages. Employees determine their withholding amounts by filling out IL-W-4.
If your employees live in other states or work across state lines, Illinois has reciprocal agreements with Iowa, Wisconsin, Kentucky, and Michigan. This gives employees the option of withholding taxes based on their home state. Your business must be registered with both the Department of Employment Security and the Department of Revenue.
Illinois Franchise Tax
Corporate business owners must pay the Illinois state franchise tax in addition to the corporate income tax. This applies to S and C corporations, as well as LLCs, but not to unincorporated partnerships or sole proprietorships.
The planned full repeal of the Illinois franchise tax (originally scheduled for 2024) was reversed by the Illinois legislature in 2021. The franchise tax stays in effect indefinitely. As of 2025, the first $10,000 in annual franchise tax liability is exempt. Both foreign and domestic corporations conducting business in Illinois are subject to this tax.
The Illinois Department of Revenue exempts many from this tax, such as legal activities including maintaining or defending proceedings, holding internal meetings, maintaining bank accounts and securities, and single transactions finished within 120 days without repetition.
Illinois Replacement Tax
The Replacement Tax started on July 1, 1979. Also known as the personal property replacement tax, it's imposed on income from trusts, partnerships, subchapter S corporations, and corporations. It replaces money local governments lost when they could no longer impose their own personal property taxes. This tax is collected by Illinois and paid out to local governments.
The rate is based on net income. Traditional corporations pay 2.5% of their net income. Other forms pay 1.5% of their net income. Due dates vary based on the legal form of the business.
Illinois Withholding Tax
Illinois Withholding Tax is a state tax that employers must deduct from employees' paychecks, covering wages, salaries, and tips. Employers are responsible for withholding the appropriate amount and remitting it to the Illinois Department of Revenue. The withholding tax rate varies based on the employee's income level and filing status.
Illinois Unemployment Insurance Taxes
If you have employees in Illinois, you're likely subject to state unemployment taxes administered by the Illinois Department of Employment Security (IDES). Businesses are typically required to pay unemployment taxes when:
- You've paid $1,500 in wages in a single calendar quarter or employed someone for 20 weeks within a year.
- You've paid $1,000 in cash wages in one calendar quarter for domestic work.
- You've paid $20,000 in cash wages in a single calendar quarter or employed 10 or more workers for 20 weeks in a given year for farm work.
As of 2025, new employers face an unemployment tax rate of 3.525%, with a taxable wage base of $13,916. For established employers, the rate varies based on your business's experience and number of employees.
Illinois Small Business Taxes for Different Entities
Corporations
A business in Illinois is subject to the Illinois corporation franchise tax, personal property replacement tax, and corporate income taxes. C corporations pay a combined effective rate of 9.5%: 7% corporate income tax plus 2.5% Personal Property Replacement Tax.
S Corporations
S corporations aren't typically subjected to federal income taxes because income is passed through to shareholders, who pay federal taxes on their share. Illinois recognizes federal S elections but still requires payment of personal property replacement taxes and the annual franchise tax. The personal property replacement tax is paid at 1.5% of net income.
Limited Liability Companies (LLCs)
A standard LLC is a pass-through entity. Business income is distributed to members, who pay state and federal taxes on their share. Illinois requires the LLC itself to pay personal property replacement tax at 1.5% of net income. Default LLCs are classified as partnerships when filing, but many businesses choose to classify an LLC as a corporation, which subjects the business to corporate income tax.
Partnerships
Income is distributed to partners, who pay taxes on their share for both Illinois and federal returns. Partnerships must also pay the personal property replacement tax at 1.5% of overall net income.
Trust Your Business Taxes to a Professional CPA in Chicago
It's difficult to manage all these tax issues, but we can help with accounting services that minimize your tax responsibilities while keeping you compliant — even for pass-through entities or personal income taxes.
Most small businesses in Illinois aren't sure how to work with the Department of Revenue to pay their state tax. If that's you, turn to Lewis.cpa and our small business tax and accounting services. Contact us today and start optimizing your taxes!
