Complete Guide to Illinois LLC Taxes in 2025
Illinois presents a unique tax environment for LLC owners, combining a flat 4.95% individual income tax rate with an unusual entity-level tax that few other states impose. The Illinois Personal Property Tax Replacement Tax -- often simply called the "replacement tax" -- adds 1.5% on the net income of partnerships and multi-member LLCs, making Illinois one of only a handful of states that taxes pass-through entity income at both the entity and member levels. This comprehensive guide covers everything you need to know about operating an LLC in Illinois from a tax perspective.
How Illinois Taxes LLCs
Illinois follows the federal classification of LLCs for state tax purposes, treating them as pass-through entities by default. However, Illinois adds a significant twist: the Personal Property Tax Replacement Tax (commonly called the "replacement tax") imposed directly on multi-member LLCs at the entity level.
For a single-member LLC (disregarded entity), income flows through to the owner's personal Illinois Form IL-1040. The single-member LLC does not file a separate Illinois return and is not subject to the replacement tax. For a multi-member LLC (taxed as a partnership), the LLC must file Illinois Form IL-1065 (Partnership Replacement Tax Return) and pay the 1.5% replacement tax on its net income. Each member then reports their share of income on their personal IL-1040 and pays the 4.95% individual income tax.
Key Point: The 1.5% replacement tax is a genuine entity-level tax -- it is paid by the LLC itself, not by the members. This means multi-member Illinois LLCs effectively face a combined state tax burden of 6.45% (1.5% replacement + 4.95% individual). This makes Illinois one of the more expensive states for partnership taxation, despite its moderate flat income tax rate.
Understanding the Illinois Replacement Tax
The Personal Property Tax Replacement Tax was enacted in 1979 to replace the local personal property tax on businesses. Despite its historical origin, it functions today as a straightforward entity-level income tax on partnerships and S-Corporations.
Key facts about the replacement tax:
- Rate for partnerships/LLCs: 1.5% of net income
- Rate for S-Corporations: 1.5% of net income
- Rate for C-Corporations: 2.5% of net income (in addition to the 7% corporate income tax)
- Who pays: The entity itself, not the individual members
- Filing: Reported on Form IL-1065 (partnerships) or Form IL-1120-ST (S-Corps)
- Exemption: Single-member LLCs (disregarded entities) are NOT subject to the replacement tax
The replacement tax is calculated on Illinois net income, which starts with federal partnership income and applies Illinois-specific additions and subtractions. Common additions include federally tax-exempt interest income, while common subtractions include interest from US government obligations.
Illinois Individual Income Tax
Illinois has a flat 4.95% individual income tax rate on all taxable income. The Illinois Constitution requires a flat rate -- in 2020, voters rejected a proposed constitutional amendment that would have allowed graduated rates. This means the rate is the same regardless of income level.
Illinois does not allow a standard deduction or personal exemption in the traditional sense. Instead, Illinois provides a personal exemption amount ($2,625 per person for 2025) that directly reduces the tax owed (as an exemption, not a deduction). Illinois taxable income starts with your federal adjusted gross income, with certain Illinois-specific modifications.
| Tax Component | Rate / Amount | Notes |
|---|---|---|
| Illinois Income Tax | 4.95% (flat) | On all taxable income |
| Replacement Tax (Partnerships) | 1.5% | Entity-level on net income |
| Annual Report Fee | $75 | Due before formation anniversary |
| State Sales Tax | 6.25% | Plus local additions (avg ~8.81% combined) |
| Federal SE Tax | 15.3% | On 92.35% of net earnings |
Federal Taxes for Illinois LLC Owners
Beyond Illinois state taxes, LLC members must also pay federal taxes:
- Self-Employment Tax (15.3%): Covers Social Security (12.4% up to $176,100 in 2025) and Medicare (2.9% on all earnings, plus 0.9% surtax above $200,000 single/$250,000 MFJ).
- Federal Income Tax: LLC income taxed at federal bracket rates (10% to 37%).
- QBI Deduction: Up to 20% of qualified business income under Section 199A, subject to limitations.
Tax Tip: Given Illinois' combined 6.45% state tax burden on multi-member LLCs, S-Corporation election deserves serious consideration. While S-Corps also pay the 1.5% replacement tax, the SE tax savings on distributions can more than offset this. Use our S-Corp Tax Calculator to compare.
Illinois LLC Annual Filing Requirements
Illinois LLCs must file an Annual Report with the Illinois Secretary of State. The filing fee is $75. The report is due before the first day of the LLC's anniversary month (the month it was formed). For example, if your LLC was formed on June 15, your annual report is due by June 1 each year.
Late filing results in a $100 penalty. Failure to file can eventually result in administrative dissolution. Illinois also charges $150 for a reinstatement after involuntary dissolution.
Illinois LLC Filing Deadlines
| Filing Type | Deadline | Extension |
|---|---|---|
| Single-Member LLC (IL-1040) | April 15 | Yes, to October 15 |
| Multi-Member LLC (IL-1065) | March 15 | Yes, to September 15 |
| S-Corp (IL-1120-ST) | March 15 | Yes, to September 15 |
| Annual Report | Before formation anniversary month | No extension |
| Estimated Payments (IL-1040-ES) | Apr 15, Jun 15, Sep 15, Jan 15 | No extension |
Estimated Tax Payments in Illinois
Illinois requires estimated tax payments from LLC members who expect to owe $1,000 or more in state income tax after withholding and credits. Payments are made quarterly using Form IL-1040-ES. To avoid underpayment penalties, pay at least the lesser of 100% of the prior year's tax or 90% of the current year's tax.
For the replacement tax, multi-member LLCs must make estimated payments if the expected replacement tax liability exceeds $400. Replacement tax estimated payments are made quarterly using Form IL-1065-V.
Illinois Sales Tax for LLCs
Illinois has a base state sales tax rate of 6.25% on general merchandise. Local jurisdictions add additional taxes, bringing the combined average rate to approximately 8.81%. Some categories have reduced rates: qualifying food, drugs, and medical appliances are taxed at 1% at the state level.
Chicago has notably high combined rates -- as high as 10.25% in some areas. If your LLC sells taxable goods, register with the Illinois Department of Revenue for a Retailer's Occupation Tax (ROT) certificate.
Illinois LLC Formation Costs
- Articles of Organization: $150 filing fee with Illinois Secretary of State
- Registered Agent: Required; must have an Illinois address ($0 self-serve, $50-$200/year commercial)
- Operating Agreement: Not required by law but strongly recommended
- EIN: Free from the IRS
- Annual Report: $75/year (ongoing)
- Publication Requirement: None (unlike New York)
Illinois vs. Neighboring States for LLC Taxes
| State | Income Tax | Annual Fee | Entity Tax |
|---|---|---|---|
| Illinois | 4.95% flat | $75 | 1.5% replacement tax |
| Indiana | 3.15% flat | $31 biennial | None |
| Iowa | 4.4-6% graduated | $60 biennial | None |
| Wisconsin | 3.5-7.65% graduated | $25 | None |
| Missouri | 2-4.8% graduated | $0 | None |
| Kentucky | 4% flat | $15 | LLET (min $175) |
Illinois' combined state tax burden of 6.45% on multi-member LLCs makes it significantly more expensive than neighboring Indiana (3.15%, no entity tax) and Missouri (up to 4.8%, no entity tax). However, Illinois' large economy, central location, and business infrastructure continue to attract LLC formations despite the higher tax burden.
Pass-Through Entity Tax Election (PTET)
Illinois enacted a Pass-Through Entity Tax (PTET) election beginning in 2022 that allows eligible LLCs to elect to pay state income tax at the entity level at the 4.95% rate. This is separate from and in addition to the mandatory 1.5% replacement tax.
The PTET serves as a workaround to the federal $10,000 SALT deduction cap. When a qualifying LLC makes this election, members receive a credit on their individual returns. The state income tax paid at the entity level becomes a deductible business expense at the federal level, bypassing the SALT cap. For high-income LLC owners, this can produce substantial federal tax savings.
Important: The PTET is an elective tax on top of the mandatory replacement tax. An LLC making the PTET election would pay both the 1.5% replacement tax and the 4.95% PTET at the entity level, with members receiving credit for the PTET portion only.
Chicago-Specific Taxes for LLCs
LLCs operating in Chicago face additional local tax obligations that don't apply elsewhere in Illinois:
- Chicago Personal Property Lease Transaction Tax: 9% on non-possessory computer leases (including many SaaS products)
- Chicago Amusement Tax: 9% on amusement receipts (expanded to include streaming services)
- Chicago Use Tax: Additional 1% on items purchased outside Chicago for use within the city
- Chicago Business License: Required for most businesses; fees vary by type ($250+ for Limited Business License)
Common Illinois LLC Tax Mistakes
- Forgetting the replacement tax: Multi-member LLCs must pay the 1.5% replacement tax in addition to individual income tax. Many new LLC owners overlook this entity-level obligation.
- Missing the annual report deadline: The $100 late penalty makes timely filing important. Mark your calendar for the month before your formation anniversary.
- Not evaluating PTET election: The pass-through entity tax election can save significant federal taxes for LLC owners hitting the SALT cap.
- Ignoring estimated payments: Both individual and replacement tax estimated payments are required if thresholds are met.
- Single-member LLCs paying replacement tax: Only multi-member LLCs pay the 1.5% replacement tax. Single-member LLCs are exempt.
- Overlooking Chicago taxes: Chicago imposes multiple local taxes that can significantly increase your total tax burden.
Illinois LLC Tax Deductions
Illinois starts with federal adjusted gross income as the basis for state tax calculations. Key deductions for Illinois LLC owners:
- Home Office Deduction: Recognized at both federal and state levels
- Vehicle Expenses: Standard mileage rate or actual expenses
- Health Insurance: Self-employed health insurance deduction
- Retirement Contributions: SEP-IRA, Solo 401(k) contributions
- Replacement Tax Deduction: The replacement tax paid is deductible on your federal return as a business expense, reducing federal taxable income
- Section 179: Illinois generally conforms to federal expensing rules
Illinois Conformity Note: Illinois uses federal AGI as the starting point but has specific additions (e.g., interest from other states' bonds) and subtractions (e.g., retirement income, Social Security). The personal exemption ($2,625 per person) is an exemption that reduces tax owed, not a deduction from income.
Dissolving an Illinois LLC
To dissolve an Illinois LLC, file Articles of Dissolution with the Secretary of State (no filing fee for voluntary dissolution). Before filing, settle all debts, distribute remaining assets, and file final tax returns including a final IL-1065 and replacement tax return marked as "final." Pay any outstanding replacement tax and file a final annual report if due. Retain records for at least three years beyond the filing date.