Illinois S Corp Tax: Everything You Need to Know
In Illinois, having an S corporation status has tax advantages.3 min read
2. S Corporations
3. S Corporations: Other Advantages
4. S Corporations: Disadvantages
Updated November 23, 2020:
In Illinois, having an S corporation status has tax advantages. While all businesses, from sole proprietors to traditional corporations, are liable to certain taxes, there are some that S corporations are not obliged to pay because of their status.
Illinois Business Taxes
There are three business-related taxes in Illinois to which corporations may be subject:
- Corporate income tax
- Personal property replacement tax
- Corporation franchise tax
If you earn money from your business as personal income, you will also be taxed on that.
The corporate tax rate in Illinois is currently a flat 9.5%. This is among the highest in the country. On the other hand, personal income tax is among the lowest in the nation — a flat 5% on federal adjusted gross income.
The personal property replacement tax is calculated from the business' net income. The tax is 2.5% of net income for traditional corporations, and 1.5% of net income for other forms of business.
Illinois' corporation franchise tax, charged for the privilege of doing business in Illinois, is based on the business's net worth. It is paid annually on the anniversary date of the formation of the business. On the anniversary, the tax is 0.15% of the year's paid-in capital, with a minimum charge of $25. This goes down to 0.1% of each year's paid-in capital for the following years with a minimum $25 charge and a $2 million cap, plus 0.1% of the basis. If there was an increase in paid-in capital, the business will also be charged franchise tax each month for the following year.
To form an S corporation, first form a traditional corporation. Then file an S corporation election with the Internal Revenue Service.
There are tax benefits to being an S corporation.
- You only pay payroll taxes on salaries, not on profits. This does not mean you can avoid payroll taxes by taking your salary in the form of profits. You are required to draw a “reasonable” salary which will be taxed.
- Profits from S corporations “pass through” to the shareholders. The shareholders are then responsible for their personal income tax. S corporations are held liable for a personal property replacement tax of 1.5% of net income and yearly corporation franchise taxes.
- Since all taxable income passes through to shareholders, S corporations do not usually pay a separate federal income tax.
- S corporations do not pay self-employment tax, which is an additional 15.3%. However, this does not mean you don't have to pay social security taxes.
S Corporations: Other Advantages
- The death or incapacitation of one or more shareholders does not affect the business's ongoing operations since the business and its shareholders are independent of one another.
- This form of incorporation can accommodate fractional ownership in their initial stock offering.
- The company's ownership can change through stock sales and giftings without affecting the company's ongoing operation.
- S corporations have a lower risk of unrecognized equity liquidations since their finances and records are separate from those of their stockholders.
- There is a separation between the business and the shareholder's other investments and savings.
- There is the potential for improved access to credit and necessary resources.
- If each of the shareholder-employees are paid sufficiently for their work, any earnings that represent “return on investment” such as interest and rental payments are not liable to self-employment tax.
S Corporations: Disadvantages
- Corporate officers may need to provide lenders personal guarantees, opening them up to liability.
- Decision-making can be stymied by shareholder conflicts.
- Minority shareholders may be prevented from recovering the value of their investment due to restrictions in the bylaws on the sale of stock and/or buyback agreements.
- As shares are sold or gifted, a voting block created by shareholders, not actively involved in the business and unsympathetic to the needs and desires of the managing shareholders, can easily cause organizational troubles.
- Shareholder-employees who own 2% or more stock, as well as their direct relatives, are liable to taxation on employment benefits such as life insurance, health insurance, and housing, since these are considered taxable income.
- In the event the business dissolves, any appreciated assets owned by the business will result in significantly increased income taxes.
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