For small business owners in Illinois, understanding the state's tax landscape is essential. This comprehensive guide explores the complexities of Illinois small business tax. From choosing your business structure to managing income tax, sales tax, employment taxes, and property taxes, we've got you covered.
With insights and strategies, our Chicago CPA firm aims to empower you to navigate the Illinois tax system confidently to make sure your small business thrives in a tax-efficient manner. Let's embark on this tax journey together for your business's success in Illinois.
Illinois Business Landscape Overview
In the vibrant economic tapestry of Illinois, small businesses are important contributors. According to the Illinois Small Business Profile, the state boasts a thriving community of 1.2 million small businesses, which form the backbone of its commercial sector, representing an overwhelming 99.6% of all business entities. This dynamic segment plays a crucial role in the state's employment landscape, providing jobs to 2.5 million people, which equates to 44.7% of the workforce in Illinois.
The business dynamics within Illinois reflect both the resilience and challenges faced by these small enterprises. In a period marked by significant economic fluctuations, particularly between March 2020 and March 2021, the state witnessed the emergence of 39,354 new establishments. However, this period also saw the closure of 31,400 businesses, leading to a net increase of 7,954 establishments. Notably, the small business sector was at the forefront of this flux, accounting for 38,231 openings and 29,458 closures.
Employment trends within these small businesses have mirrored this pattern of exuberance and challenge. While 59,543 establishments experienced growth in employment, there was a contraction in 80,019 establishments. As a result, there was a net decrease of 144,980 jobs within the small business sector. These statistics highlight the dynamic nature of the small business environment in Illinois that’s marked by both opportunities for growth and the realities of economic volatility.
In summary, the small business landscape in Illinois is characterized by its significant contribution to the state's economy and employment, alongside a resilience that navigates the ebb and flow of economic changes. As an important component of Illinois's economic structure, these small businesses continue to shape the state's commercial success and adaptability.
What Kind of Business Taxes Must Be Paid in Illinois?
In Illinois, small businesses may be required to pay various types of business taxes depending on their structure, location, and activities.
Some of the common business taxes in Illinois include:
- State income tax: Illinois imposes a state income tax on individuals and businesses. Business owners may be responsible for paying state income tax on their business profits, depending on the legal structure of the business.
- Sales and use tax: Businesses that sell tangible goods or certain services are typically required to collect and remit sales tax to the state. Use tax may also apply if a business purchases taxable items from out-of-state sellers.
- Employment taxes: Businesses with employees must withhold and remit state income tax from their employees' wages. Employers are also responsible for paying state unemployment insurance tax (SUI) and other employment-related taxes.
- Property tax: Businesses that own real property or personal property in Illinois are subject to property taxes. The property tax rate and assessment process can vary depending on the business’ location.
- Franchise tax: Illinois imposes a franchise tax on corporations, which is based on the corporation's paid-in capital. This tax is in addition to the state income tax.
- Miscellaneous taxes: Depending on the nature of the business, there may be other taxes or fees applicable, such as the Retailer's Occupation Tax for businesses engaged in retail sales.
Illinois Business Tax Rates Overview
It's important to note that tax obligations can vary based on the legal structure of the business (e.g., sole proprietorship, partnership, corporation, LLC), the location of the business, the industry, and the specific activities conducted.
Illinois Business Income Tax
If you're the owner of 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 or Illinois income tax.
- The corporate income tax rate in Illinois is a flat 7%.
- 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.
Optional Pass-Through Entity (PTE) Tax
- Illinois offers an optional PTE tax, applicable until 2025.
- 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.
In the following sections, we'll explore how these taxes and rates apply to different business entity types in Illinois.
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 imperative to understand and comply with the state's Sales and Use Tax regulations. Here's what you need to know.
Illinois enforces sales tax on tangible personal property and certain services sold within the state. Additionally, use tax is applied to items where sales tax wasn’t originally charged and collected. This applies, for example, when a business uses items from its sales inventory for its own purposes.
The standard sales and use tax rate for general merchandise in Illinois is 6.25%. However, there is a reduced rate of 1% for qualifying food, drugs, and medical appliances. It's important to note that local jurisdictions in Illinois have the authority to impose their own taxes, which can be combined with the state sales tax rate. These local tax rates are subject to change twice a year, on January 1 and July 1.
To determine the specific tax rates applicable to your location, you can use the Illinois Department of Revenue's Tax Rate Finder, which provides up-to-date information on local tax rates.
Sales Tax Nexus
Sales tax professionals may discuss the concept of "Nexus" with you, which refers to a business's connection to Illinois for tax purposes. Generally, having a nexus in Illinois means having a physical presence, such as a brick-and-mortar store or generating affiliate revenue exceeding $100,000 in the previous 12 months within the state. If your business meets these criteria, it’s essential to comply with Illinois sales tax regulations.
Ensure that your business is registered for an Illinois sales tax permit. Without one, your business cannot legally collect Illinois sales tax on its transactions.
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.
If 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 will likely 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 Withholding Tax
Illinois Withholding Tax is a state tax that employers in Illinois are required to deduct from their employees' paychecks. This tax covers various forms of income, including wages, salaries, and tips. Employers are responsible for withholding the appropriate amount from each employee's earnings and remitting it to the Illinois Department of Revenue. The withholding tax rate can vary based on the employee's income level and the filing status claimed. Accurate withholding ensures that employees meet their state tax obligations throughout the year, minimizing the potential for tax owed at the end of the tax year and helping to fund vital state services.
Illinois Unemployment Insurance Taxes
Illinois Unemployment Insurance Taxes are a crucial component of the state's unemployment compensation program, ensuring financial assistance for eligible workers facing job loss. If you have employees in Illinois, you're likely subject to state unemployment taxes administered by the Illinois Department of Employment Security (IDES). Here's what you need to know.
Businesses are typically required to pay unemployment taxes in Illinois under various circumstances:
- 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.
In 2023, new employers face an unemployment tax rate of 3.95%, with a taxable wage base of $13,271. For established employers, the tax rate varies based on your business's experience and the number of employees.
By contributing to the Illinois Unemployment Trust Fund, these taxes ensure that eligible workers can access financial support when they experience involuntary job loss. Managing your unemployment insurance tax liability requires accurate wage reporting and compliance with state regulations to ultimately help sustain economic stability for both businesses and workers in Illinois.
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’re 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’s 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. If you’re in this scenario, turn to small business tax and accounting services for all. Contact our CPA today and start optimizing your taxes!