Illinois Income Tax Act Guide for Small Businesses
Learn how the Illinois Income Tax Act taxes individuals, S corporations, partnerships and C corporations, with slides, a who-pays table and a payroll note.
Last reviewed October 29, 2026 · General information, not legal advice
General information only, not legal advice. CPA Tax Payroll and Accounting Corp is a CPA firm, not a law firm. Laws change: confirm with the official source or a licensed attorney before you act. Read the full notice.
The Illinois Income Tax Act is the state law that taxes the income of individuals and businesses in Illinois, and the Illinois Department of Revenue (IDOR) runs it. This page explains who pays which Illinois income tax and how employer withholding fits in. It is written for owners of small businesses, freelancers, nonprofits and professionals.
Slide show: The Illinois Income Tax Act in seven slides
What the law does
Illinois taxes income at a flat rate for individuals. IDOR collects the tax and the withholding employers send in.
Who it covers
Individuals, C corporations, S corporations, partnerships, trusts, estates and out-of-state people earning Illinois-source income.
The rule
Individuals pay 4.95%; C corporations pay 7% plus 2.5% replacement tax. S corporations and partnerships pay 1.5% replacement tax, and their owners pay income tax on their shares.
A key number
The 2026 personal exemption allowance is $2,925. It is not allowed above $250,000 of federal adjusted gross income, or $500,000 on a joint return.
Deadlines
Individuals pay estimated tax on 15 April, 15 June, 15 September and 15 January. Employers pay withholding monthly or semiweekly and file Form IL-941 each quarter.
Penalties
Late payment costs 2% for 1 to 30 days and 10% after that. Interest is 7% a year from 1 January 2025 through 31 December 2026.
Tip
Pay by the original due date. A filing extension gives more time to file, not more time to pay.
Who is covered
Taxpayer
Illinois income tax
Replacement tax
Return
Individual, including a sole proprietor
4.95%
None
IL-1040
C corporation
7%
2.5%
IL-1120
S corporation
None at entity level; shareholders pay on their share (4.95% for individuals)
1.5%
IL-1120-ST
Partnership or multi-member LLC taxed as a partnership
None at entity level; partners pay
1.5%
IL-1065
Trust
4.95%
1.5%
IL-1041
Estate
4.95%
None listed
IL-1041
Tax-exempt organization
Tax on unrelated business taxable income only
Also applies to that income (2.5% corporation, 1.5% trust)
IL-990-T
Replacement tax is a separate entity-level tax beside the regular income tax; investment partnerships are not subject to it. Out-of-state businesses are taxed on Illinois-source income. Federal law P.L. 86-272 can protect a company whose only Illinois activity is soliciting orders for goods filled from outside the state, but not a resident or Illinois-incorporated company. Compare S corporation, partnership and C corporation taxes.
How it touches your taxes and payroll
Illinois starts from the federal figure (federal adjusted gross income for individuals, federal taxable income for entities) and then applies Illinois additions and subtractions; see the Internal Revenue Code page. Employers withhold 4.95% of pay after allowances. Withholding is a trust tax, so the employer owes it even if it forgot to withhold, and a responsible person who willfully fails to pay can be personally liable for the unpaid amount. Individual owners of S corporations and partnerships pay 4.95% on their shares plus the entity's 1.5% replacement tax, while a C corporation pays 9.5% (7% plus 2.5%) before any shareholder tax on dividends.
