Illinois Corporation Taxes
|---|---|---| | C Corporation | 7% | 2.5% | 9.5% | | S Corporation | Not applicable | 1.5% | 1.5% |
Formation and Annual Compliance Costs
You file Articles of Incorporation with the Illinois Secretary of State to form a domestic corporation under 805 ILCS 5/2.10. The formation fee is $150, and you must file an annual report each year before the first day of your corporation's anniversary month for $75.
Illinois requires a minimum of one director, and directors do not need to be Illinois residents. You must maintain a registered agent and registered office in Illinois, though the registered agent may be an individual resident, an entity authorized to do business in Illinois, or an organizer, manager, member, or employee of the corporation.
Franchise Tax Status
Illinois no longer requires corporate franchise tax payments for amounts due on or after January 1, 2025. However, your corporation still must file annual reports with the Secretary of State and pay all applicable income and replacement taxes to the Illinois Department of Revenue.
The elimination of franchise tax simplifies your compliance calendar but does not reduce your overall state tax exposure. You remain responsible for 7% corporate income tax plus 2.5% replacement tax (or 1.5% replacement tax if you elect S corporation status).
Additional Tax Obligations
Beyond corporate income and replacement taxes, your corporation is subject to Illinois sales tax at 6.25% (before local add-ons) on taxable sales. You must register with the Illinois Department of Revenue before making taxable sales or hiring employees—registration is free through MyTax Illinois or Form REG-1.
For detailed corporate tax information, visit the Illinois Department of Revenue at https://tax.illinois.gov/research/taxinformation/income/corporate.html.
S Corporation vs. C Corporation Taxation at State Level
Illinois recognizes S corporations at the state level and taxes them fundamentally differently from C corporations. Your choice between these two structures creates a significant state-level tax gap that you should understand before electing S corporation status.
C Corporation Taxation in Illinois
C corporations in Illinois pay a combined state income tax of 9.5%: the 7% corporate income tax under 35 ILCS 5/ plus a 2.5% replacement tax. This applies to all net income earned within Illinois, regardless of whether you distribute profits to shareholders.
You file your C corporation's Illinois income tax return with the Department of Revenue annually. The 7% rate applies to your Illinois-taxable income after allowable deductions. The 2.5% replacement tax is calculated separately on Illinois-taxable income and represents a floor-level tax obligation even if your net income is minimal.
C corporations also must file an annual report with the Illinois Secretary of State for $75.00 each year, due before the first day of your anniversary month (the month you incorporated).
S Corporation Taxation in Illinois
S corporations in Illinois do not pay the 7% corporate income tax. Instead, you pay only a 1.5% replacement tax on Illinois-taxable income. This creates an 8-percentage-point advantage over C corporations at the state level alone.
Like C corporations, S corporations must file annual reports with the Secretary of State for $75.00. However, the income tax savings are substantial: an S corporation with $100,000 in Illinois-taxable income pays $1,500 in replacement tax, while a C corporation pays $9,500 in combined taxes.
The income itself passes through to your shareholders, who then pay individual Illinois income tax at 4.95% on their allocable share of S corporation income. This creates a potential double-taxation advantage if your personal tax rate is lower than the combined C corporation rate, though you must account for self-employment tax obligations on S corporation distributions.
Comparison Table
| Tax Element | C Corporation | S Corporation |
|---|---|---|
| Corporate income tax | 7% | 0% |
| Replacement tax | 2.5% | 1.5% |
| Combined state rate | 9.5% | 1.5% |
| Pass-through to owners | No | Yes |
| Owner-level tax (individual) | N/A | 4.95% |
| Annual report fee | $75 | $75 |
| Statute citation | 35 ILCS 5/ | 35 ILCS 5/ |
Key Considerations for Your Election
Illinois recognizes S corporation elections made under federal tax law. You elect S corporation status on your federal Form 2553, and Illinois automatically respects that election for state tax purposes. You do not file a separate Illinois S corporation election form.
The 1.5% replacement tax applies to all S corporations regardless of profitability. Even if your S corporation has no net income in a given year, you may owe replacement tax depending on how Illinois calculates your taxable income base.
If you have nonresident shareholders, you must withhold Illinois income tax on their allocable share of S corporation income. Illinois imposes withholding requirements on pass-through entities with nonresident owners, which adds administrative complexity that C corporations do not face.
The choice between C and S corporation taxation depends on your expected profitability, your personal tax bracket, and whether you plan to retain earnings in the business. Consult a tax professional to model your specific situation against the 8-percentage-point state-level rate difference.
Pass-Through Entity Taxation and Individual Income Tax
Illinois taxes pass-through entities—including S corporations, partnerships, and LLCs taxed as partnerships—differently than C corporations. You generally do not pay Illinois income tax at the entity level, but you owe 1.5% replacement tax on Illinois-taxable income. Individual owners then pay 4.95% Illinois income tax on their distributive shares, plus self-employment tax on applicable income.
Illinois Individual Income Tax Rate
You pay Illinois individual income tax at a flat rate of 4.95% on your Illinois-source income. This rate applies whether you are a W-2 employee, a sole proprietor, or a pass-through entity owner receiving distributions. The Illinois Department of Revenue administers this tax under 35 ILCS 5/.
Pass-Through Entity Replacement Tax
Partnerships and S corporations generally do not pay the 7% Illinois corporate income tax. Instead, you owe a 1.5% replacement tax on Illinois-taxable income at the entity level. This replacement tax is separate from and in addition to individual income tax paid by owners on their shares of entity income.
LLCs taxed as partnerships or S corporations for federal purposes follow the same replacement-tax rule. If your LLC is taxed as a C corporation, you pay the full 7% corporate income tax plus 2.5% replacement tax instead.
Owner-Level Tax Obligations
As a pass-through entity owner in Illinois, you report your distributive share of entity income on your individual Illinois return and pay 4.95% income tax on that amount. You also remain subject to federal self-employment tax on applicable income. Illinois does not impose a separate self-employment tax, but self-employment income may affect your Illinois tax liability.
Nonresident owners of Illinois pass-through entities may face additional withholding requirements. Check the Illinois Department of Revenue pass-through entity information page at https://tax.illinois.gov/research/publications/pubs/pass-through-information.html for current withholding rules.
Estimated Tax Deadlines
You must make quarterly estimated tax payments if you expect to owe $500 or more in Illinois income tax for the year. Estimated tax deadlines are April 15, June 15, September 15, and January 15. File and pay through the Illinois Department of Revenue at https://tax.illinois.gov/.
S Corporation Election and Taxation
Illinois recognizes S corporation elections made under federal law. An S corporation generally does not pay Illinois corporate income tax but owes 1.5% replacement tax on Illinois-taxable income. You then pay 4.95% individual income tax on your W-2 wages and distributive share of S corporation income.
Electing S corporation status can reduce self-employment tax compared to a partnership or sole proprietorship, since only W-2 wages are subject to self-employment tax. However, you must pay reasonable W-2 compensation to yourself as an employee.
Comparison: C Corporation vs. Pass-Through Taxation
| Entity Type | Entity-Level Tax | Owner-Level Tax | Combined State Tax |
|---|---|---|---|
| C Corporation | 7% income tax + 2.5% replacement tax | 4.95% on dividends | Up to 14.4% (no double-tax relief) |
| S Corporation | 1.5% replacement tax | 4.95% on income | Up to 6.45% |
| Partnership / LLC (Partnership) | 1.5% replacement tax | 4.95% on income | Up to 6.45% |
| Sole Proprietorship | None | 4.95% on income | 4.95% |
C corporations face potential double taxation in Illinois because the state does not allow a deduction for dividends paid to shareholders. Pass-through entities avoid entity-level income tax but remain subject to the 1.5% replacement tax.
Withholding and PTE Elections
Illinois requires pass-through entities with nonresident owners to withhold Illinois income tax on distributions. The withholding rate is generally 4.95% of the nonresident owner's distributive share. You may be able to reduce or eliminate withholding by filing a withholding certificate with the entity.
Pass-through entities may also make a composite return election to file and pay Illinois income tax on behalf of nonresident owners, avoiding individual withholding. Consult the Illinois Department of Revenue for current composite return procedures and forms.
Sales Tax and Pass-Through Entities
Illinois imposes a 6.25% state sales tax on taxable sales of tangible personal property and certain services. Pass-through entities must register with the Illinois Department of Revenue before making taxable sales or hiring employees. Registration is free and may be completed through MyTax Illinois or Form REG-1 at https://tax.illinois.gov/questionsandanswers/286.
Pass-through entity status does not affect sales tax obligations. You collect and remit sales tax based on the nature of your business, not your entity type.
Illinois Department of Revenue Resources
The Illinois Department of Revenue maintains current information on pass-through entity taxation, withholding, and estimated tax requirements at https://tax.illinois.gov/. Key pages include:
- Corporate income tax: https://tax.illinois.gov/research/taxinformation/income/corporate.html
- Pass-through entity information: https://tax.illinois.gov/research/publications/pubs/pass-through-information.html
- Income tax rates: https://tax.illinois.gov/localgovernments/income.html
Contact the Department of Revenue directly for guidance on your specific entity structure and tax obligations.
Franchise Tax Status
Illinois no longer requires corporations to pay Secretary of State franchise tax on amounts due on or after January 1, 2025. However, domestic and foreign corporations still file annual reports with the Secretary of State and remain subject to Illinois income and replacement taxes through the Department of Revenue.
What Changed
Illinois phased out its corporate franchise tax system. The old franchise-tax sections are scheduled for repeal, and no payment is required for franchise tax that would otherwise have been due on or after January 1, 2025. This represents a significant shift from Illinois's historical franchise-tax structure.
What You Still Owe
Even though franchise tax no longer applies, your Illinois corporation faces two separate ongoing obligations:
Annual Report to Secretary of State
You must file an annual report with the Illinois Secretary of State each year. The annual report fee is $75.00 and is due before the first day of your corporation's anniversary month.
Income and Replacement Taxes to Department of Revenue
Your corporation remains subject to Illinois state-level income and replacement taxes administered by the Illinois Department of Revenue, not the Secretary of State. C corporations generally pay 7% Illinois corporate income tax plus 2.5% replacement tax (combined 9.5% framing). S corporations generally do not pay the 7% corporate income tax but owe 1.5% replacement tax on Illinois-taxable income.
Key Takeaway
The elimination of franchise tax does not eliminate your tax obligations—it simply removes one specific tax while leaving income and replacement taxes in place. Budget for the $75 annual report fee to the Secretary of State and coordinate your income tax filings with the Illinois Department of Revenue at https://tax.illinois.gov/.
Federal Tax Obligations and Entity Classification
Illinois C Corporation Federal Tax Treatment
Your Illinois C corporation is classified as a C corporation for federal tax purposes by default under the Internal Revenue Code. You must file Form 1120 (U.S. Corporation Income Tax Return) annually with the IRS and pay federal corporate income tax on your net taxable income.
At the state level, your C corporation pays 7% Illinois corporate income tax plus 2.5% replacement tax on Illinois-taxable income, for a combined state rate of 9.5% (805 ILCS 5/). You remain subject to these Illinois income and replacement taxes through the Department of Revenue even though Illinois eliminated its corporate franchise tax requirement for amounts due on or after January 1, 2025.
You must also file an annual report with the Illinois Secretary of State for $75.00 each year before the first day of your anniversary month.
Illinois S Corporation Election and Pass-Through Treatment
You may elect S corporation status for federal tax purposes by filing Form 2553 with the IRS. Illinois recognizes S corporation elections at the state level, and your S corporation generally does not pay the 7% Illinois corporate income tax.
However, your S corporation generally owes 1.5% replacement tax on Illinois-taxable income to the Illinois Department of Revenue. You must still file an annual report with the Illinois Secretary of State for $75.00 each year.
S corporation income passes through to shareholders, who report their share on their individual federal returns. Shareholders pay federal income tax on their allocable share of S corporation income at ordinary rates (currently up to 37% federal), plus 4.95% Illinois individual income tax on their share of Illinois-taxable income.
Federal vs. State Entity Classification Mismatch
Illinois allows you to elect a different federal tax classification than your state-law entity type. For example, you may form an Illinois corporation but elect to be taxed as an S corporation or partnership for federal purposes.
If you form an Illinois LLC, you may elect to be taxed as a C corporation, S corporation, or partnership for federal purposes by filing the appropriate IRS form (Form 8832 for C corporation election, Form 2553 for S corporation election). Your state-level Illinois tax obligations depend on your actual business structure under Illinois law (805 ILCS 180/), not your federal election.
Federal Estimated Tax Deadlines
You must make federal estimated tax payments if you expect to owe $1,000 or more in federal income tax. Illinois aligns its estimated tax deadlines with federal deadlines: April 15, June 15, September 15, and January 15.
Corporations typically make estimated payments using Form 1120-W. S corporations and partnerships generally do not make entity-level estimated payments; instead, owners make individual estimated payments based on their allocable share of pass-through income.
Sales Tax and Federal Nexus
Illinois imposes a 6.25% general merchandise state sales tax rate before local taxes and special district add-ons. You must register with the Illinois Department of Revenue for sales tax purposes if you make taxable sales or hire employees.
Federal nexus rules (established by South Dakota v. Wayfair, 138 S. Ct. 2080) require you to collect and remit sales tax in Illinois if you have economic nexus with the state, regardless of physical presence. Register through MyTax Illinois or Form REG-1 at no registration fee (https://tax.illinois.gov/questionsandanswers/286).
Self-Employment Tax for Pass-Through Owners
If you operate as an Illinois LLC, partnership, or S corporation, you are subject to federal self-employment tax on your net earnings from self-employment. S corporation shareholders who are also employees may reduce self-employment tax by taking a reasonable W-2 salary and receiving the remainder