Illinois Law
Illinois Business Tax Law
- Business Tax Law
Business Tax Law
Taxes and the Form of Organization
In Illinois, if a business is required to file for sales and use tax, business income tax, or withholding income tax, it must also complete a Form NUC-1, Illinois Business Registration. Other forms may also be required to properly complete the form NUC-1, including:
- Schedule M, Multiple Business Address Schedule
- Form NUC-542-A, Notice of Sale or Purchase of Business Assets
- Form IL-W-4, Employee's Illinois Withholding Allowance Certificate
- ST-19, Retailer's Tax Booklet
- IL-700, Illinois Withholding Tax Guide and Tables
- Form IL-703-BK, Request for Tax Forms
- Request Card for Federal Tax Kit
- UI-1 (stock no. 4229), Report to Determine Liability (Department of Employment Security)
Sole Proprietorship
Under a sole proprietorship, the owner is the taxpayer. Thus, the individual tax rate applies, rather than the higher corporate rate. The owner reports income and expenses from the business on his or her individual federal income tax return, using federal Schedule C with Form 1040. Generally, a sole proprietor cannot claim personal insurance, such as health, dental, and life insurance, as a business expense. Most sole proprietors are liable for self-employment tax, discussed below, which is filed with federal Form SE. Usually, sole proprietors make estimated tax payments in quarterly installments during the year, using federal Form 1040-ES and Illinois Form 505-1. There is no special form for reporting sole-proprietorship income to the state. Instead, copies of the federal forms and schedules are attached to the Illinois individual return, Form IL-1040.Partnership
A partnership itself does not pay taxes; each partner reports his or her income and deductions individually on federal Form 1040, Schedule E, and Illinois Form IL-1040. Thus, the individual tax rate rather than the higher corporate rate applies to each partner. Generally, benefits such as health, dental, and life insurance are not deductible by individual partners. Partners usually are liable for self-employment tax, and generally they make quarterly estimated tax payments toward their year-end tax liability, using federal Form 1040-ES and Illinois Form 505-1.Even though it does not pay taxes directly, a partnership is required to file a federal "information return" (Form 1065) which reports partnership income and distributions to the partners. Other forms and schedules may be required also. An Illinois partnership must file an information return (Form IL-1065) with the Illinois Department of Revenue (IDOR) if it has a base income (loss) as defined under the Illinois Income Tax Act. In Illinois, since January 1, 1994, if a limited liability company is treated as a partnership, generally it will be treated as a partnership for tax purposes. A partnership organized for the sole purpose of playing the Illinois State Lottery is not required to file a Form IL-1065.
Corporation
A corporation is an association of shareholders created under law and regarded by the courts as an artificial person with its own legal identity. There are two kinds of corporations, C corporations and S corporations, and each is subject to different tax laws.C Corporation
At the federal level, a C corporation is taxed under the provisions of Subchapter C of the Internal Revenue Code, and it is subject to a tax rate that is higher than the individual rate. For 1993, the corporate tax rate ranged from 15 percent for a corporation with an income of $50,000 or less, to 35 percent for a corporation with an income over $10 million. Corporations use federal Form 1120 or Form 1120-A to report income, deductions, and credits, and to compute tax. Other federal forms also may be required. In Illinois, since January 1, 1994, if a limited liability company is treated as a corporation generally, it will be treated as a corporation for tax purposes.The taxable income of a C corporation is determined prior to distribution of shareholder dividends. Each shareholder reports dividend income from a C corporation on his or her individual Form 1040. Thus, profits distributed as dividends are taxed twiceonce on the C corporation's tax return and again on an individual shareholder's tax return. Shareholders may not use a corporation's losses for their individual tax purposes. However, dividends may be accumulated by the corporationup to certain limitsto postpone the double taxation. For state taxes, a C corporation uses Illinois Form IL-1120 and is liable for a minimum fee based on property, payroll, and sales attributable to Illinois.
For purposes of the state income tax, C corporations are permitted to deduct:
- Interest income from United States Treasury obligations
- Foreign trade dividends from Schedule 1299-B
- Contributions from Schedule 1299-B
- High-impact business interest from Schedule 1299-B
- Contributions to job training projects
S Corporation
Subchapter S of the Internal Revenue Code applies to an S corporation, which generally is not directly liable for federal income tax. Instead, each shareholder pays tax on his or her share of the S corporation's income and deductions by including it on federal Form 1040. However, an S corporation is required to file federal Form 1120-S with supporting schedules. Also, an S corporation files Illinois Form IL-1120-55, and it must pay a minimum fee to the state based on property, payroll, and a proportion of its sales attributable to Illinois. Corporations that do business in Illinois or own property in Illinois may be subject to Illinois taxes if they are determined to have a sufficient connection or nexus with the state. Some activities that justify imposition of Illinois tax laws are:- Having a place of business in Illinois
- Having employees or independent contractors conducting business in Illinois
- Owning or leasing tangible personal property in Illinois
- Purchasing tangible property upon which no Illinois sales tax is paid
Tax Credits
- Businesses with 30 or fewer full-time employees or $1 million or less in gross receipts may credit expenses related to complying with the Americans with Disabilities Act.
- Employers of persons from targeted groups with particularly high unemployment rates or special employment needs may credit wages paid to members of the targeted groups.
- Some businesses that increase their research activities over a base amount may credit about 20 percent of the amount of increase.
Taxpayer Identification Numbers
There are three types of taxpayer identification numbers that apply to Illinois businesses: the Federal Employer Identification Number (EIN), a corporation number, and the Illinois Employment Security Account Number. An EIN is required for all businesses. A sole proprietor generally uses his or her personal Social Security Number as the EIN. However, certain sole proprietors and all partnerships and corporations must apply for an EIN from the Internal Revenue Service (IRS) using Form SS-4. Additionally, sole proprietors must obtain an EIN if they have employees or a retirement plan, or if they are liable for federal excise taxes, such as for alcohol, tobacco, or firearms. The IDOR will issue an Illinois Business Tax Number. This and other numbers are assigned when the business files a Form NUC-1. An Illinois Employment Security Account Number is issued upon request by the Illinois Department of Employment Security.Selecting the Tax Year
A tax return is based on an accounting period called a tax year. A tax year may be either a calendar year or a fiscal year. A calendar year is 12 consecutive months from January 1st through December 31st. A fiscal year is composed of any other 12 consecutive months. Once a tax year is established, a business needs IRS approval to change it. Businesses use the same tax year for federal and state tax returns. Sole proprietorships usually use a calendar tax year. A partnership generally must use the same tax year as the partners who own a majority interest. If the majority partners' years differ, the business must use the same tax year as the principal partnersthose with a five percent or greater interest in partnership profits or capital. If the principal partners' years conflict, a partnership generally uses a calendar tax year. A fiscal tax year can be used if the IRS agrees that there is a business purpose for using a fiscal year, or if the partnership files IRS Form 8716, Election to Have a Tax Year Other than a Required Tax Year, also known as a "Section-444 election." In the latter case, a business may have to pay a fee that represents the amount of tax deferral benefit that results from using a fiscal, rather than calendar, year. A C corporation's first income tax return establishes its tax year. The first tax year must not be greater than 12 months from the date of incorporation. A C corporation that provides personal services must use a calendar tax year unless it has IRS approval to use a fiscal year or it makes a Section-444 election. An S corporation must use a calendar tax year unless it gets IRS approval. In some cases, S corporations may make a Section-444 election.Employment Taxes
Payroll Taxes
The taxes discussed here are often called payroll taxes because employers are responsible for deducting an employee's share of tax from his or her earnings before the employee is paid.FICA Taxes
Taxes under the Federal Insurance Contributions Act (FICA) help pay for Social Security and Medicare benefits. Businesses without employees do not pay FICA tax. Most sole proprietors and partners in partnerships without employees pay a self-employment tax, which is discussed later in this chapter. Businesses that have employees contribute half of the total FICA tax, and are responsible for collecting the other half from employees through payroll deductions. For 1995, the tax rate for the Social Security portion of FICA tax was 6.2 percent each for employers and employees (a total of 12.4 percent). The maximum wage subject to the tax changes annually. The 1995 tax rate for the Medicare portion of FICA tax was 1.45 percent each for employers and employees (2.9 percent total). Special rules apply to employees who receive tips, to persons who receive both wages and self-employment income, and to employees receiving non-wage payments for items such as meals, lodging, clothing, and some services. The employer's share of FICA taxes is deductible as a business expense.Income Tax Withholding
Along with the employee's share of FICA tax, employers must withhold federal and state income tax from the employee's pay. The amount to withhold is determined by the employee's pay and by the number of withholding allowances that the employee claims on federal Form W-4, Withholding Allowance Certificate. Employees are required to complete Form W-4 when hired, and generally the employer retains the form. However, the form must be filed with the IRS if the employee claims more than 10 withholding allowances, or if the employee claims exemption from withholding and his or her wages normally exceed $200 per week. A monetary penalty may be assessed against the employer for any form that is not filed when required. Residents of Indiana, Iowa, Kentucky, Michigan, or Wisconsin may elect to claim exemption from withholding of Illinois income tax, under the Reciprocal Withholding Agreements, by completing a copy (two copies for Iowa residents) of the IL-W-5-NR form.Employers must furnish a statement of wages and taxes (federal Form W-2) to employees by January 31st of each year or, if requested by the employee, within 30 days of termination. The federal copy of Form W-2 must be submitted to the IRS, accompanied by federal Form M-3, Transmittal of Income and Tax Statements. The state copy must be sent to the IDOR and accompanied by Form IL-501, IL-941, or IL-W-3.
Payroll Tax Return
Generally, employers report FICA taxes and withheld federal income tax together on federal Form 941, Employer's Quarterly Federal Tax Return, which is filed at the end of each calendar quarter. There are different forms to be used for agricultural and household workers and for employees who are not subject to FICA taxes. Most employers are required to make deposits for payroll taxes before returns are actually due. How often deposits must be made is determined in part by how much tax liability a business has accrued in the past. For example, a business that owed $50,000 or less in payroll taxes during a specific previous 12-month period may be designated a monthly depositor; a business that owed $50,000 to $100,000 during the specific period may be designated a semi-weekly depositor. The depositor designation is reevaluated annually. A business' actual tax liability at the end of each deposit period determines whether it actually must make a deposit. If the amount of accumulated undeposited liability reaches $100,000 in any period, taxes must be deposited the day after that volume is reached, and if the business' deposit status was monthly, it is immediately changed to semi-weekly.Self-Employment Tax
Self-employment tax is a Social Security and Medicare tax for individuals who work for themselves. This includes sole proprietors and most partners in partnerships without employees. Net earnings of $400 or more are subject to self-employment tax. For 1995, there were ceilings on the amount of earnings subject to the tax: $61,200 for the Social Security portion of the tax, but no ceiling for the Medicare portion. The Social Security portion was assessed at 12.4 percent of earnings, and Medicare was assessed at 2.9 percent, for a total self-employment tax of 15.3 percent. Federal Schedule SE is used to calculate self-employment tax, which is then added to one's total tax liability on Form 1040. One-half of the self-employment tax is deductible as an adjustment to gross income on Form 1040.Unemployment Tax
Federal and state governments have programs to help support able workers who lose their jobs. Tax under the Federal Unemployment Tax Act (FUTA) is reported by eligible employers once per year on federal Form 940 or 940-EZ. The form usually is due one month after the end of the calendar year. However, deposits toward the annual payment are required at the end of any quarter in which the employer accrues $100 or more in FUTA tax liability. Penalties may be imposed for late filing and late deposits. Most employers, even those with part-time employees, are responsible for paying FUTA tax. The general rule is that a business is subject to FUTA tax if the business pays wages of $1500 or more in any calendar quarter, or the business had a least one part-time employee in each of 20 different (not necessarily consecutive) calendar weeks. In addition, FUTA tax is due on cash wages of $1000 or more paid in any calendar quarter to domestic workers who work in a private home, local college club, or local fraternity or sorority house.A business that employs farm workers is subject to FUTA tax on their wages if the wages total $20,000 or more in any calendar quarter, or if there was at least one day in each of 20 different calendar weeks when the business had 10 or more at least part-time farm workers. The tax is figured at a rate of 6.2 percent of the wages paid to the employee up to $7000. Tip income reported by an employee to an employer for FICA tax purposes is considered wages for calculating FUTA tax. However, the tax does not apply to some payments, such as workers' compensation payments, nor does it apply to certain types of employment, such as earnings paid to cooperative education students. A business is credited for up to 5.4 percent of the amount it pays for state unemployment tax, which can reduce the actually tax liability to 0.8 percent. The IRS administers the FUTA tax.
The state has its own unemployment program and corresponding taxes. Any employer that conducts business in Illinois is required to submit Form UI-1, Report to Determine Liability under the Illinois Unemployment Insurance Act to the Illinois Department of Employment Security (IDES), within a month of initiating business in the state. The IDES then informs the business whether it is liable for the tax. Liability is based on the number and type of employees, the amount of wages paid, and other factors. The tax rate for new employers is based generally upon experience, but the standard rate in 1993 was 3.7 percent. Construction, agriculture, forestry, fishing, and mining businesses are assigned a separate rate which falls generally between 4.4 percent and 5.5 percent. Once a business has paid unemployment tax for a period of time, the tax rate will be based on the business' experience, using a benefit conversion factor. The minimum experience rate is 0.6 percent. The maximum experience rate is 8.2 percent. An employer's experience rate is redetermined annually, just after June 30th.
Illinois has a "targeted jobs tax credit." The credit allows for a reduction on federal income tax of up to $2400 for hiring first-year "targeted workers" and up to $1200 for wages paid to eligible summer youth. To qualify, the employer should request new employee eligibility from the IDES before the employee starts work.
Illinois requires that businesses pay unemployment taxes and file wage reports quarterly. The quarterly tax return has two parts: the Contribution Report, which contains summarized information, and the Wage Detail Report, which shows information for each employee. There are penalties and fines up to $10,000 that can be imposed on businesses that fail to file on time, do not pay the necessary employment taxes, or fail to keep accurate employment records. IDES audits employer records periodically. Businesses are allowed to deduct unemployment taxes as business expenses.
Acquired Businesses
An Illinois firm that acquires an existing business which has been subject to unemployment tax is required to file Form UI-1 S&P, Report to Determine Succession. The new business may be eligible to have an experience rate computed based on all or part of the predecessor's experience; in some cases, an acquired business may be required to use the predecessor's experience rating. By statute, an individual or business that acquires all or part of an existing Illinois employer's business or assets is jointly and severally liable for the predecessor's unpaid tax, interest, and liabilities.Sales and Use Taxes
State sales tax in Illinois consists of two rates: 6.25 percent for general merchandise, and one percent for qualifying food, drugs and medical appliances. Qualifying food, drugs, and medical appliances include: (1) food that has not been prepared for immediate consumption, such as most food sold at grocery stores, but excluding hot foods, alcoholic beverages, and soft drinks; (2) prescription medicine and non-prescription items claimed to have medicinal value, such as aspirin, cough medicine, medicated hand lotion, and fluoride toothpaste; and (3) prescription and non-prescription medical appliances that directly replace malfunctioning parts of the human body. Examples of these medical appliances include corrective eyewear, contact lenses, prostheses, insulin syringes, and dentures.
All taxpayers located in the Regional Transit Authority or the Metro-East Mass Transit District must pay an additional mass transit tax. These taxpayers are generally located in Cook, DuPage, Kane, Lake, McHenry, or Will County, or select cities such as Madison or St. Clair. The tax varies from 0.25 percent to one percent.
Certain taxpayers are subject to an additional 0.25 percent water commission tax. Residents of the following areas are subject to the water commission tax:
- Cook County (Bensenville, Hinsdale, Oakbrook, Roselle)
- DuPage County (all cities except Aurora, Bartlett, Burr Ridge, Chicago, Elk Grove Village, Hanover Park, Northlake, St. Charles, or Schaumburg)
- Will County (Naperville or Woodridge)
- Whether taxpayer is a retailer
- The taxpayer's cost ratio
- Whether Illinois tax is paid to the supplier of merchandise sold with the service
Local Sales Tax
In addition to the sales tax imposed by the state, a number of cities have been granted authority to impose local sales taxes. Also, all towns and cities in Illinois have the right to impose a "lodging tax" on hotels and motels for the purpose of funding a convention or tourism bureau to promote tourism to the city or town. Permits and filing forms for the sales taxes imposed can be obtained from the IDOR or directly from the cities or towns.Other Taxes
Many of these taxes are reported with federal Form 720, Quarterly Federal Excise Tax Return. Although the return is filed quarterly, the taxes generally must be deposited before the return is due. There are additional excise taxes that are reported separately from those described above. For example, certain heavy vehicles, including buses, truck tractors, and trucks with gross vehicle weights of 55,000 pounds or more, are subject to a federal highway use tax. Pickup and panel trucks are not subject to the tax. Generally, the vehicles must be used on public roads more than 5000 miles per year. This tax is reported on IRS Form 2290, Heavy Vehicle Use Tax Return. There are also taxes on alcohol, tobacco, and firearms that are filed with the Bureau of Alcohol, Tobacco, and Firearms.
Resources
Illinois Department of Revenue, Willard Ice Building, 101 Jefferson Street W., P.O. Box 19044, Springfield IL 62794-9044; James R. Thompson Center, 100 Randolph Street W., Seventh Floor, Chicago IL 60601-3274, 1-800-732-8666, (217) 782-3336; TDD 1-800-544-5304 (write for forms and free information booklets, including Booklet IL-700, Illinois Withholding Tax Guide and Tables; Booklet ST-19, Retailer's Tax Booklet).
For federal forms, including Employer's Tax Guide (Circular E, Pub. 15), contact the Internal Revenue Service, 1-800-TAX-FORM.