Doing business in Illinois can feel like running a gauntlet of taxes, but the state actually ranks near the middle of all states when ranked for total taxes levied, according to the Tax Foundation. That means the state charges a lot of different kinds of taxes but the cumulative total is average. Still, keeping track of federal, state, and local requirements can be a burden on small businesses that provide goods and services.
All business decisions and procedures can be tweaked from time to time to improve efficiency and ensure compliance. Staying on top of taxes is particularly important as significant penalties can be levied for missing payments. If your business is struggling with tax compliance issues, it may be time to discuss the situation with an experienced business attorney who can help you craft a long-term solution.
Understanding Your Relationship with Taxes
Payroll taxes, unemployment taxes, sales tax, income tax, and use tax are just a few of the many state- and federal-level levies that Illinois businesses pay. Have you been frustrated looking for ways to reduce the burden? Some may be successful in lowering their taxes by changing the way their business is incorporated. Your company has to be on top of the latest wrinkles in state and federal regulations—or partner with someone who is.
For instance, your business may be eligible for a 20 percent deduction on net income if you are incorporated in a specific way. The federal government made the 20 percent Qualified Business Income (QBI) deduction permanent in mid-2025. Eligible businesses are those with “pass through” structure such as sole proprietors, S corporations, partnerships, and estates or trusts. (Did you know that you can also avoid some self employment tax if your business is an S corporation?) But there are limiting factors for the deduction, including the income source.
Along with claiming as many deductions as possible, it’s important to avoid penalties by making mistakes in your record-keeping. In Illinois, local taxes are often added to state-level taxes, including sales tax, which the state puts at 6.25 percent. When local sales taxes are added, the result can be as high as 8.92 percent.
Use taxes are complementary to Retailer Occupation Taxes (ROT). It is applied to the storage and/or use of an item on which no sales tax was paid. The two types of use taxes are:
- Consumer use tax, a self-reported tax on items purchased (such as online) for which the seller did not charge or pay the local sales tax due. These are reported on the buyer’s state income taxes.
- Vendor/retailer use tax applies to sales made to customers outside the retailer’s home state. The vendor or retailer is not responsible for paying sales tax to the buyer’s home state unless they have a physical or financial nexus there (presence exceeding a specific threshold). If the vendor does not pay sales tax it is the duty of the buyer.
These taxes are also due on items purchased with the intent to sell but converted to business use instead. You are responsible for making sure the seller collects the correct amount according to where you are in Illinois. Businesses must remit sales taxes to the state according to the average amount collected (monthly for $200 or more).
Other things to know about use taxes:
- They are not required when items are purchased at wholesale with the intention to resell them (sales tax to be paid as items are resold).
- Many services are not taxable, so window washers, music lessons, and accounting work do not require use taxes under most circumstances.
- Exempt items do not require use tax collection, including medical devices and most prescriptions.
Get Professional Help with Your Illinois Tax Status
The business law professionals at Legacy & Life Law Firm LLC can help your small business find its way through the confusing maze of Illinois taxes. A professional can evaluate your corporate status and help you maximize deductions—and avoid tax penalties. Call for a consultation today.