In this article, we discuss which taxes a small business might have to pay if operating in Illinois.
Are you a new small business owner in Illinois stressing over which taxes your supposed to pay and which do not apply to your business? Well, you’re not alone. The list of applicable taxes for small businesses in Illinois can appear daunting, but the most important thing is to figure which taxes apply to your business. A qualified business attorney and accountant can help determine which taxes you should be paying and guide you through the accounting and filing process. Below is a non-exhaustive list of the most common taxes that apply to small businesses in Illinois.
Sales Tax
If you sell physical goods (widgets, food products, furniture, etc), whether online or inside a brick and mortar location, you are responsible for collecting Illinois’ (and usually the local municipality’s) Sales and Use Tax and remitting these back to the appropriate tax agencies. As of writing this, the Illinois Sales Tax Rate is 6.25% with local municipalities being as high as 4.75%. There are some categories of goods that are exempt from sales tax. For a comprehensive list check out the Illinois Department of Revenue website. Illinois does not require collection on sales tax on digital goods, such as an album purchased through a website or app, or the digital copy of a video game.
You may hear your account or attorney talk about “Nexus” within Illinois; this refers to the business having something that ties it to Illinois (or another state) for sales tax purposes. Usually, nexus in Illinois comes from having a physical presence in the state where you sell goods, but nexus can also be generated from having affiliate businesses or individuals in Illinois that generate sales over $100,000 worth of product in Illinois over the last 12 months.
Make sure to register for a sales tax permit in Illinois, as it is illegal to collect sales tax in Illinois without a permit. When registering for your permit be sure to have your personal info, business info, social security number or employer identification number, business entity type, and the bank account info where the sales tax will be deposited.
Payroll Taxes
If your business has employees in Illinois you’ll have to match your employee’s payroll withholding taxes in addition to contributing to state and federal unemployment taxes based on your employee’s earned wages. Employees will fill out form IL-W-4, Illinois Employee’s Withholding Allowance Certificate, to determine the amount of withholdings.
If your employees live in a different state or work part or full time in a different state than where they live than you should be aware that Illinois has reciprocal agreements with different states. Currently, Illinois has reciprocal agreements with Iowa, Kentucky, Michigan, and Wisconsin. This means that your employees can have the option to withhold taxes associated with his or her home state. As an employer, you’ll need to register with the Illinois Department of Revenue and the Illinois Department of Employment Security.
Illinois Franchise Tax
The state of Illinois charges a Franchise Tax for corporate business owners. This includes LLCs, C-Corporations, S-Corporations but not sole-proprietorships and unincorporated partnerships. Understanding the franchise tax, whether it applies to your business and determining how much your business is supposed to pay can be difficult at first. We highly suggest working with a good accountant and small business attorney to get all your taxes organized. The good news is that as part of Governor Pritzker’s new budget the Franchise tax will be phased out over the next four years. But for now, you need to know that the Illinois Franchise Tax applies to domestic and foreign corporations for the right to transact business in Illinois and is measured by paid-in capital. There are two ways that Illinois allows you to calculate and pay your Franchise Tax; it’s best to speak with an accountant to determine which is right for you. There are some business activities that are exempt from the Franchise Tax, below is a list of examples:
- Legal activity, such as maintaining, defending settling a proceeding;
- Holding meetings for internal corporate matters;
- Maintain bank accounts;
- Manage securities;
- Single transactions completed within 120 days and not repeated consistently; or
- Sell through independent contractors
Illinois State Income Tax
Sole-proprietorships, S-corporations, and LLCs are considered “pass-through” entities. The net profits of these businesses will pass-through to the owners and will be taxed at the individual’s income bracket. The income tax returns for these types of companies generate a K-1 form for each shareholder or partner (this is the equivalent of a W-2, but for owners, but does not already include withheld income taxes). The business owner can file and pay quarterly or in one lump at the end of the year.
This list does not cover every applicable tax associated with operating a business in Illinois. It’s best to work with a qualified accountant and small business attorney to calculate the correct taxes due, maximize your tax return, file on time, pay on time, and save all that time and headache of doing it alone.
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