Starting a business in Illinois: the tax a business partner creates

Illinois is not a state with fifty small local complications. It has no city or county income tax anywhere — Chicago included, which surprises people who expect a big American city to behave like Detroit or Kansas City — so payroll withholding is one state rate for every employee at every address. What it has instead are two large, specific things: an entity-level tax on pass-throughs, and Chicago.

The state fees themselves are middling. $150 to form, $75 a year for the annual report, and free registration for sales and withholding tax on MyTax Illinois. Five years of an Illinois LLC costs $450 in Secretary of State fees, which is more than Ohio or Missouri and much less than the replacement tax on any real profit.

The LLC hub has the formation fees for all fifty states if you are still comparing. The rest of this page is about the two Illinois-specific costs and the one Illinois-specific relief.

The Personal Property Replacement Tax is a leftover: Illinois abolished the local personal property tax in 1979 and replaced the revenue with a state tax on business income, which it hands back to local government. The name tells you nothing about who pays it, so here is who.

Notice what that table does. It puts a price on a decision that usually gets made for non-tax reasons — bringing in a co-founder, adding a spouse as a member, converting to an S corporation to save self-employment tax. Each of those turns a business with no Illinois entity tax into one with a 1.5% bill on net income, payable by the company.

None of which means don't do it. An S corporation election that saves $6,000 of self-employment tax is still ahead after $1,800 of replacement tax. The point is to run the arithmetic with the Illinois number in it, which most calculators leave out, and to know that adding the second member is the moment the tax attaches rather than something that happens later.

The Department of Revenue's own guidance says it in those five words, and it is the single most useful fact on this page for a consultancy, an agency, a design studio or a trades business selling labour. There is no sales tax to collect, no permit to hold and no return to file — not because you are below a threshold, but because the tax does not reach what you sell.

That is a real divergence from the neighbours. Iowa taxes roughly a hundred enumerated services. Wisconsin and Ohio both tax defined lists that include lawn care, cleaning and security work. In Illinois, a firm selling only services collects nothing statewide.

Two edges to know about. Illinois does tax tangible personal property, and items of tangible property transferred incidentally to a service fall under the Service Occupation Tax — so if a job includes parts, materials or a physical deliverable, that portion is in scope. And a Chicago address changes the picture in a way the state rule does not cover, which is the next section.

Where you do sell goods, the general merchandise rate is 6.25% state (1% on qualifying food, drugs and medical appliances) with home-rule cities, counties and transit districts adding on top — about 7% to 9% outside Chicago, and 10.25% in the city. Registration on MyTax Illinois is free and covers withholding tax in the same account.

Outside Chicago, most Illinois municipalities charge a general business registration of $25 to $100 and many charge nothing at all. Chicago licenses almost everything through the Department of Business Affairs and Consumer Protection, and the fees rose sharply on 1 January 2026.

Chicago also runs an amusement tax and a bottled-water tax, all administered by the city's Department of Finance rather than by the Illinois Department of Revenue — a separate account, separate returns, separate deadlines. None of it appears in your state registration.

The Illinois Workers' Compensation Commission puts it without qualification: if you have one employee, even a part-time employee, you must obtain workers' compensation insurance. There is no headcount grace period of the kind Missouri, Kansas and Wisconsin give.

What sets Illinois apart is the enforcement, which is worth reading before deciding to take a chance on it.

Owners are treated separately: sole proprietors, partners, corporate officers and LLC members may elect out of cover for themselves, but must still insure their employees.

On unemployment tax, register with IDES through MyTax Illinois. Liability starts on whichever comes first: $1,500 of wages in a single calendar quarter, or employing one or more people for 20 weeks in a calendar year. For 2026 the taxable wage base is $14,250 per worker and the standard entry rate for a new employer is 3.350% — 3.450% for employers in NAICS sector 56, administrative support and waste management. The 2026 state experience factor is 102%, down from 114% in 2025, so the rates are moving in the right direction. That works out at roughly $477 per employee per year in state unemployment tax at the entry rate.