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Knowing about Taxes

Taxation for small businesses can be quite simple or very complex, depending on the size, business structure and type of operation. The following list outlines the major taxes with which a business must be concerned. Tax liability of each business will be different. 

Income Tax

Every individual, partnership, corporation, trust and estate residing in Illinois earning or receiving income in Illinois must pay an income tax based on net income. A replacement tax is also applied to the net income of partnerships, corporations and trusts. S Corporations are subject only to replacement tax.
Sole Proprietors must pay individual income taxes on earnings from the business.

Partnerships and Limited Liability Companies must pay taxes on the distributive share of each partner or owner's income. In addition, Illinois has a replacement tax that applies to partnerships.

Corporations must pay a corporate income tax and replacement tax which is administered and collected by the Illinois Department of Revenue (IDOR). In addition, corporations are assessed a franchise tax each year based on their paid-in capital and a Corporate Personal Property Tax Replacement Income Tax. Corporate and franchise taxes are administered and collected by the
Secretary of State's Office.

Sales Tax

Use Tax is imposed directly on the purchaser for the privilege of using and consuming tangible personal property in Illinois that has been purchased anywhere. Illinois retailers pay the Retailers' Occupation Tax (ROT) and, by law, reimburse themselves for the tax by collecting Use Tax from customers, based on the selling price of the tangible personal property. The business can keep 1.75% of the taxes collected for acting as an agent for IDOR (if tax is paid in a timely manner).

Service Occupation Tax (SOT) is imposed directly on the receipts from the selling price of any tangible personal property transferred as part of a sale of service, if the cost to the service person is 35% or more of the total charged.

Service Use Tax is imposed directly on the purchaser and is based on the selling price of the property transferred incident to a sale of service. The Service Use Tax is intended to reimburse the service person for his/her SOT liability.

Sales Tax Exemption Examples

  • Sales for resale (purchaser must have a resale certificate)
  • Sales made in interstate commerce
  • Sales to exclusively charitable, religious, educational or governmental organizations, or recreational organizations for those over 55 years old (Pursuant to legislation enacted in 1985, IDOR issues an exemption number. In order to claim an exemption for purchases made on or after July 1, 1987, the purchaser must have this number)
  • Charges for service or repair labor
  • Distillation machinery and equipment used to produce ethyl alcohol for motor fuel for personal use and not for resale
  • Personal property sold to or utilized by interstate carriers for hire for use as rolling stock moving in interstate commerce
  • Farm machinery and equipment including replacement and repair parts
  • Graphic arts equipment, including replacement parts
  • Manufacturing machinery and equipment, including replacement parts
  • Oil rigs and coal exploration equipment
  • Enterprise Zone building materials purchased from retailers located within the Enterprise Zone's taxing jurisdiction for use in an enterprise zone
  • Enterprise Zone materials used in manufacturing for use in an enterprise zone
  • Farm chemicals
  • Magazines and newspapers

Property Tax

All for-profit real estate owners are required to pay property taxes. The property tax rate is determined by local taxing districts and is paid to the township or county tax collector in the year following assessment.

Withholding taxes

Certain taxes must be withheld from employee wages and remitted to the government. These include state and federal income taxes, FICA (Social Security) and Medicare. You may be required to register with both the federal government and the State of Illinois for tax withholding purposes.