A Complete Guide to Illinois Tax Laws for Small Business Owners
  

Business taxes in Illinois are complex – with varied state tax rates based on business structure, sales volume, jurisdictional factors, and the scale of each business’ property and real estate. Fortunately, a growing number of state-sponsored tax credits and incentive programs can reduce the overall tax burden for many small businesses in Illinois, especially when working with a qualified accounting and tax firm like Accounting Freedom.

In this guide, we’ll explore the numerous state tax obligations small businesses in Illinois must fulfill, providing comprehensive guidance on how to avoid common state tax filing mistakes, apply for tax credits, ensure long-term compliance, and benefit from accounting, tax, and payroll solutions.

 

Types of Taxes Small Businesses in Illinois Must Pay

State Income Tax

Corporations and limited liability companies (LLCs) with a C corporation tax election must pay Illinois business income tax, also known as corporate income tax or Illinois income tax. Illinois business income tax is set at a flat rate of 7% of a business’ total net income.

Some business structures, including sole proprietorships, partnerships, S corporations, and standard LLCs are not required to pay Illinois business income tax.

Illinois State Sales Tax

In Illinois, sales and use tax rates are set at 6.25% on general merchandise, with a lower rate of 1% applying to food, drugs, and qualifying medical appliances. In some jurisdictions, local sales and use tax rates are higher than the state rate and are combined with the state sales tax rate. We advise businesses to revisit the local sales tax rates that apply to their business as they are subject to change twice a year (January 1st and July 1st).

In addition to sales tax imposed on general merchandise, food, drugs, and qualifying medical appliances, sales tax is also imposed on certain services, some tangible personal property, and use tax is likewise applied to some items when sales tax was never applied/collected.

Businesses that sell general merchandise or food, drugs, or qualifying medical appliances are required to file Form ST-1, Sales and Use Tax and E911 Surcharge Return. Illinois facilitates online payments for state sales and use tax.

Your business’ filing frequency will depend on the amount of sales tax you collect. Annual returns are due on January 20th of the year after the reporting year, while quarterly returns are due on the 20th day of the month after the reporting quarter. Monthly returns must be submitted on the 20th day of the month after the reporting month (A June return is due on July 20th, for example).

When a retailer or servicer’s monthly liability is $20,000 or more, sales tax payments are due on a quarter-monthly basis – on the 7th, 15th, 22nd, and the final day of each month. The majority of taxpayers in this category remit quarter-monthly payments by electronic funds transfer (EFT). Otherwise, they are required to mail completed Form RR-3, Sales and Use Tax Quarter-Monthly Payment to the Illinois Department of Revenue.

Employment Taxes

In the state of Illinois, employers must pay withholding tax (personal income tax) on behalf of most employees at a flat rate of 4.95% of their net income. This flat income tax rate applies to all residents regardless of their income and to all nonresidents working in the state (excluding those affected by reciprocity agreements). Withholding tax must be reported quarterly using Form IL-941, Illinois Withholding Income Tax Return, and paid using Form IL-501, Withholding Payment Coupon. Withholding payment schedules are either semi-weekly or monthly, and can be paid online to the Illinois Department of Revenue. Employers are also responsible for federal employee taxes (FICA taxes, for example), as well as additional payroll taxes that may be due based on an employee’s specific compensation, garnishment, or retirement-related circumstances.

Illinois state unemployment tax (SUTA) is administered by the Illinois Department of Employment Security (IDES) and is required of nearly all for-profit businesses. The current unemployment tax rate is 3.95% for new employers, with a taxable wage base of $13,271. For existing employers, unemployment tax rate is determined based on your business’ experience and the size of your workforce (total number of employees).

New employers in Illinois are required to register with IDES using the state’s MyTax Illinois website, file wage reports using Form UI-3/40, and pay quarterly state unemployment taxes. Payments are due on April 30th, July 31st, October 31st, and January 31st: the final day of the month following each quarter. Payments can be completed online or by mail to the IDES office in Springfield. Most employers must pay both Illinois state unemployment taxes as well as federal unemployment taxes (FUTA).

Property Tax

In Illinois, most businesses that own real estate must also pay Illinois’ personal property replacement tax, which is designed to replace state losses resulting from local governments no longer collecting personal property taxes.

The state’s personal property replacement tax is set at a rate of 2.5% of the net income of C corporations, and 1.5% of the net income of partnerships (including LLCs), trusts, and S corporations. 

All of the business structures we’ve discussed above are required to file an annual return for personal property replacement tax and make quarterly or annual payments. C corporations can report replacement tax on their corporate income tax return, making estimated payments on a quarterly basis. Partnerships and trusts do not need to make quarterly estimated payments, but their returns and payments are due on the 15th day of the fourth month after the tax year, using Form IL-1065 for partnerships and Form IL-1041 for trusts. S-corporations are also not required to make quarterly payments, but must file a return annually and make an annual payment on the 15th of the third month after the tax year, using Form IL-1120-ST.

Excise Taxes

Excise tax rates and fees vary considerably in Illinois based on a business’ industry, size, and the jurisdiction(s) where it operates. The most common industries subject to excise taxes include transportation, fuel, cigarettes, and alcohol, though other industries are impacted as well. Visit the Illinois Department of Revenue’s website for a thorough breakdown of excise taxes and fees owed and more information on how to file and report excise taxes in Illinois. 

Working with a qualified provider like Accounting Freedom can dramatically simplify local, state, and federal taxes and withholding, automating time-consuming payroll processes, granting peace of mind about compliance, maximizing tax benefits, and freeing up time to focus on core business tasks.

 

Illinois-Specific Tax Credits and Deductions for Small Businesses

From the EDGE Tax Credit to the Training Expense Credit, Illinois has been actively working to support businesses and startups that catalyze job creation, capital investment, and an improved standard of living for residents in Illinois. Accounting Freedom can help your business identify, apply for, and utilize these tax credit opportunities to reduce your overall tax obligation and focus on business growth.

EDGE Tax Credit 

The Illinois Economic Development for a Growing Economy (EDGE) program offers corporate tax credits to businesses that support capital investment, job creation, and community improvement for residents state-wide. Illinois uses a tiered system to determine the amount of corporate tax credits a business will receive and the duration of tax credit support. Using metrics like the number of world-wide employees, scale of job creation, amount of investment dollars, and whether the business expansion project occurs in an underserved area as defined by the state, the state then determines what percentage of non-refundable income tax credit the business will receive (and for how long).

For example, although the non-refundable income tax credit is typically equal to 50% of the income tax withholdings of any new jobs the business creates in the state, this percentage rises to 75% if the business project occurs in an underserved community. Additionally, businesses may be granted access to tax credits for 10 years, or 15 years for “Tier 2” businesses that have committed to an investment of $50 million or more while creating at least 100 new jobs. Businesses can also receive tax credits to reimburse for employee training costs (usually up to 10% of training costs). In every tier, businesses can not receive more in tax credits than the total project investment.

For more information about how the state determines eligibility and establishes criteria for receiving tax credits, visit the Illinois Department of Commerce’s website. Business owners should be aware that qualification for EDGE credits may simultaneously qualify their business for the state’s New Construction EDGE benefits or EDGE for Startups program, depending on the circumstances.

Research & Development (R&D) Credit

Until 2032, research activities conducted in the state of Illinois may be supported by an R&D credit of 6.5% of qualified expenses over a base amount. The base amount is defined as the average of QREs that can be attributed to Illinois over a three-year period. If credits exceed what can be used in a single tax year, they can be carried over for up to five years. 

These tax benefits are especially beneficial to tech, healthcare, and innovation industries, as well as agriculture, pharmaceutical, equipment, banking, and insurance industries. 

C-Corporations, S-Corporations, partnerships, and LLCs are all eligible to apply, and applications must be received with an annual Illinois Tax Return and accompanied by Illinois Gross Receipts cataloging the past three years of research and development work.

Training Expense Credit

In most cases, if a business in Illinois employs one or more apprentices, the employer is eligible to apply for a training expense credit of up to $3,500 per apprentice for qualified educational expenses (including but not limited to tuition, lab fees, and book fees). If the apprentice resides in an underserved area or if the business is located/operating in an underserved area, the employer may also be eligible for an additional $1,500 credit. Training expense tax credits must be earned and used in the current year and can not be applied at a later time. Certain conditions apply regarding the institution attended, qualifications of the apprentice, and other factors.

Illinois Investment Tax Credit

A number of investment-related tax credits are available in Illinois to incentivize businesses that invest in qualified property that benefits the economy and community.

As one example, the Enterprise Zone Investment Tax Credit (part of the Enterprise Zone Program) gives businesses a 0.5% credit against state income tax for any “qualified property” investments that are located in an Enterprise Zone. Qualified property is defined in the Illinois Income Tax Act, regulated by the Illinois Department of Revenue, and any credit is considered 0.5% of the basis for qualified property.

 

Filing and Reporting Requirements for Illinois Businesses

Annual Reports

The filing process and deadlines for annual reports in Illinois are different for LLCs, nonprofits, and corporations. Below, we’ll explore how to file annual reports as an LLC in Illinois and as a corporation in Illinois, using guidelines offered by the Office of the Illinois Secretary of State.

As an LLC or corporation in Illinois, annual reports are due by the end of the month before the registration anniversary month. For example, if your business incorporated on June 19th, your annual report is due on May 31st. Reports may be filed earlier – up to 60 days before the first day of the anniversary month. 

How to File an Annual Report as an LLC in Illinois

An annual report for a domestic or foreign LLC in Illinois must be filed by an officer who is included in the report’s officer section. An annual report for an LLC may be filed electronically, but it is considered an original filing, and no more than six officers and six directors may be listed in the report’s officer section. 

Any penalties incurred must be paid on the same day as electronic filing. If your LLC’s registered agent or registered office needs to be changed, you must file your annual report electronically and then change the registered office or agent online, or by completing Form LLC-1.36.1.37.

How to File an Annual Report as a Corporation in Illinois

The requirements for filing an annual report as a corporation in Illinois are the same as an LLC excluding a few key details. Corporations must pay both the filing fee and any penalties incurred on the same date as filing. Additionally, to change the corporation’s registered agent or registered office (after filing the annual report showing no changes), the corporation must complete Form BCA 5.10/5.20 or submit the changes online.

Quarterly and Annual Tax Filing

Annual and quarterly tax filing requirements vary greatly in Illinois based on your organization’s business structure, the size of your workforce, the jurisdictions where you operate, and other factors. 

One standard quarterly tax filing requirement is unemployment tax, which is due with wage reports and contributions via quarterly payments on April 30th, July 31st, October 31st, and January 31st (for Q4 of the previous year).

Each year, original returns must be filed annually using Form IL-1120 and submitted by or before the 15th day of the 4th month after the conclusion of the tax year. If your tax year ends on June 30th, your Form IL-1120 must be submitted by or before the 15th day of the 9th month after the conclusion of the tax year.

S-corporations must file their annual return using Form IL-1120-ST, while partnerships must use Form IL-1065 to file a return. 

Payroll Reporting

To submit payroll taxes in Illinois (for any business structure) an employer must possess an employer identification number (EIN), have completed Form IL-W-4 forms from all employees, and be registered with the State of Illinois via the MyTax Illinois platform.

Whether it’s semi-weekly filing of employee income tax returns or withholding tax, electronic filing must be completed through the MyTax Illinois portal, while mail filing can still (in some cases) be completed using forms IL-941 and IL-501 and sent to the Illinois Department of Employment Security.

Payroll tax obligations vary considerably business to business and employee to employee, especially when considering the full range of local, state, and federal payroll reporting and withholding that’s required.

Sales Tax Filing

As we explored in the section on Illinois state sales tax, due dates and payment frequency for sales/occupation and use tax depends on a business’ volume of sales. Whether sales tax is due annually, quarterly, monthly, or quarter-monthly depends on the business’ average monthly liability. The Illinois Department of Revenue’s Sales and Use Taxes page offers further resources on how to determine your tax obligation.

 

Common Tax Mistakes Small Businesses in Illinois Should Avoid

Navigating a wide range of state tax obligations as a small business in Illinois can be an overwhelming process. When tax compliance is monitored in-house or with inadequate professional support, it’s easy for mistakes to occur. Here are some common tax errors small businesses in Illinois make:

• Misclassification of workers (employees vs. contractors) – This is the most common misclassification error, typically occurring when a contractor’s hours and job responsibilities actually designate them as an employee. Additionally, some businesses struggle with improper designation of exempt vs. nonexempt employees. 
• Failing to file on time – With extensive federal, state, and local deadlines to manage, it’s challenging for most businesses to consistently file on time, accurately, and in full compliance with all applicable laws. Professional accounting and payroll support ensures that all of your business’ reporting and filing is completed in a timely and compliant way year-round. 
• Incorrect sales tax collected – Sales tax rate in Illinois can vary by jurisdiction (sometimes set at a higher rate than the state’s sale tax rate). Ensuring that the correct percentage is collected based on merchandise or service category while adhering to local tax rates that change twice a year can make compliance more difficult without qualified tax and payroll support. 
• Failing to apply for available tax credits – In this guide, we’ve explored just some of the state tax credits that can provide considerable tax relief to your business. Since these programs and initiatives continue to evolve, it’s essential to stay informed about new or updated credits and successfully apply for tax relief to support your business’ growth and reduce your overall tax burden.

How Accounting Freedom Can Help Your Business Stay Compliant

• Personalized Tax Services – Managing your small business’ accounting and bookkeeping on a monthly basis can be a daunting process that detracts from day-to-day operations and long-term organizational growth. That’s why we offer monthly services to reconcile your bank account, organize your general ledger, provide continuous business consulting, and generate an accurate balance sheet and income statement. All of our tax services are customizable and can be adapted to align with your business’ needs, syncing with tax planning, payroll, or tax preparation. 
• Tax Preparation and Filing – Whether your business is a partnership, S-Corporation, C-corporation, or individual enterprise, we specialize in providing income tax preparation, filing, and planning services for small businesses in Illinois. In addition to electronic filing of your returns (with transparent, 24-7 access during the process), we offer actionable recommendations for reducing your future tax burden, accessing Illinois state tax credits, freeing capital to re-invest, and minimizing your year-round tax liability. 
• Tax Planning Strategies to Reduce Liability & Noncompliance – We offer tax planning services to reduce your tax liability year-round (not just year-end) and maximize your after-tax income. With years of experience navigating multipart tax codes and monitoring new tax and labor law regulations, we ensure ongoing tax compliance for your business while reducing in-house administrative burdens. Using our consolidated digital payroll platform can provide further peace of mind about tax, payroll, and compliance concerns, automating time-consuming processes, ensuring streamlined withholding, and improving employee experience. 
• Audit Support and Representation – Audit queries are often overwhelming for small businesses to field without qualified support from tax professionals. Our extensive experience with local, Illinois, and federal tax laws and regulations allows us to responsibly review and address audit queries on your behalf. We offer strategic guidance, and assist you in negotiating a fair outcome while making informed decisions as you fulfill any compliance obligations.

Frequently Asked Questions (FAQ)

Which resources are available in Illinois to support small businesses?

In addition to tax credit and incentive programs, Illinois has established a number of Illinois Small Business Development Centers (SBDC) situated throughout the state, designed to provide training, business consulting and other resources for small businesses and startups.

What if one of my employees works in Illinois but resides in a different state?

Due to reciprocity agreements with neighboring states (Iowa, Kentucky, Michigan, and Wisconsin), Illinois employees who reside in one of the states listed above are generally exempt from Illinois withholding taxes. Instead, your business would be responsible for withholding and paying income taxes for the state where the employee resides.

What are local tax obligations in Illinois?

In Illinois, payroll taxes are only due at the state level. However, sales tax laws in Illinois are more complicated and, in some municipalities, up to 4.75% can be added in local sales taxes to the state’s existing 6.25% rate for general merchandise.

Can the State of Illinois audit my business tax return?

Yes, to verify payroll tax compliance and accuracy with other taxes and withholding, the Illinois Department of Revenue can audit a state return.

Which tax credits and incentives are available to businesses in Illinois?

Illinois is actively promoting and incentivizing capital investment, startup creation, and research & development activities, and offers a number of incentive and tax credit programs, all sponsored and managed by the Illinois Department of Commerce and Economic Opportunity.

 

Contact Accounting Freedom for Tax Help

Illinois state and local tax laws are complex and time-consuming to address, especially for small businesses focused on demanding day-to-day operations. With a dedicated accounting and bookkeeping office in Illinois, Accounting Freedom provides comprehensive accounting, tax filing, payroll, and compliance solutions to Illinois small businesses, adapting to meet your business’ needs and support your long-term goals. 

Ready to streamline state taxes, access tax credits, and enjoy lasting peace of mind about compliance and payroll? Schedule a free consultation today to start the process.