How Your LLC Will Be Taxed
In this section, we’ll go over the main business taxes required in Illinois, including state income and sales tax, and self-employment, payroll and federal taxes. LLC profits aren’t taxed at the business level they way they are in C Corporations. Instead:
State Taxes for LLCs
There are three main types of state tax you must pay to the Illinois Department of Revenue: income, sales and franchise.
Illinois Income Tax
As a business owner, you must pay Illinois income tax on any money you pay to yourself. These earnings flow through to your personal tax return. You’ll be taxed at the standard rates for Illinois, and you’ll get to apply regular allowances and deductions.
Any salaried employees will also need to pay state income tax.
The Illinois income tax rate is a flat 4.95 percent.
Illinois Sales Tax
Sales tax is collected at the point of purchase when you sell physical products or certain types of services. The amount varies depending on the region, county or city where your business is located. Depending on the type of business you have, you may be required to collect Illinois sales tax on behalf of the state's Department of Revenue.
Most states don’t levy sales tax on food, medications, clothing, gas and other necessities. Use our sales tax calculator to get an idea of what you'll need to pay. Even then, always check with your accountant and the Department of Revenue to confirm whether your business is required to collect Illinois sales tax, and to ensure you pay the right amount.
Check with the Department of Revenue to confirm whether your business is required to collect Illinois sales tax.
Illinois Franchise Tax
Some states — including Illinois — levy a tax on certain businesses for the right to exist as a legal entity and do business in the state. This is usually called a franchise tax, transaction tax or privilege tax. Despite its name, this is not a tax on franchises. It is an essential part of filing taxes for your LLC.
The Illinois franchise tax was repealed in 2020. However, that repeal won't go into effect until December 31, 2025, so you must continue to pay the franchise tax until then. The tax liability will change from year to year until the repeal is completed.
Talk to your accountant or tax preparer, or contact the Department of Revenue to determine whether you're required to pay the Illinois franchise tax, and to ensure you're paying the correct amount.
Federal Taxes for LLCs
As the owner of an LLC, you must pay self-employment tax and federal income tax, both of which are levied as “pass-through taxation."
Federal taxes can be complex, so speak to your accountant or professional tax preparer to ensure that your Illinois LLC is paying the required amount.
Federal Self-Employment Tax
All members or managers who take profits out of the LLC must pay self-employment tax. This tax is administered by the Federal Insurance Contributions Act (FICA), which covers Social Security and Medicare and other benefits. It applies to all the earnings you withdraw from your business. The current self-employment tax rate is 15.3 percent.
You'll be able to deduct your business expenses from your income when working out how much self-employment tax you owe.
Pay Less Self-Employment Tax by Treating Your LLC as an S Corporation
The Internal Revenue Service allows an LLC to be treated as an S Corporation for tax purposes, provided your business meets certain requirements. This can help you reduce the amount of self-employment tax you pay by allowing you to declare some of your income as salary and other income as distributions or withdrawals.
You do this by filing Form 2553, also known as an S Corp Election form, with the IRS. Incfile can also file the form for you. Use our S Corp Tax Calculator to get an idea of how much money you could save with this election.
Consult with your accountant or tax advisor for more information on reducing your LLC self-employment tax through an S Corporation tax election.
Federal Income Tax
You’re also required to pay regular federal income tax on the earnings you take out of your LLC. How much this is depends on your deductions, earnings, current tax bracket and filing status.
You only pay federal income tax on profits you take out of the business, minus certain deductions and allowances. This includes your tax-free amount, plus business expenses and healthcare and some retirement plan deductions.
Speak to your accountant for more information.
Employee and Employer Taxes
If you pay employees, there are some slightly different tax implications. Speak to your accountant to get clear guidance for your unique situation.
Employees May Need to File Tax Returns
Your employees may need to file their own tax returns regardless of whether you withhold federal and state income tax.
Employee Insurance and Other Requirements
You may also need to pay insurance for any employees, such as employee compensation insurance or unemployment tax.
Other Taxes and Duties for Your LLC
You may be responsible for certain other taxes and duties depending on your industry. For example, if you sell gasoline, you may need to pay a tax on any fuel you sell. Similarly, if you import or export goods, you may be required to pay other duties.
Speak to your tax preparer or accountant about any other taxes or duties you may need to pay.
Estimated Taxes for Your LLC
Most LLCs must pay estimated taxes throughout the year, depending on your adjusted gross income, taxable income, taxes, deductions and credits for the year. The most common types of estimated tax are: