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S-corp election in Illinois

In short

1.5% Personal Property Replacement Tax on net Illinois income; the corporate franchise tax still exists but the first $10,000 of liability is exempt from 1/1/2025.

Does Illinois recognize the federal S election?

Illinois automatically recognizes the federal Subchapter S election under IRC 1361(a); no separate Illinois election is required. But recognition does not mean no entity-level tax. Per IDOR, 'S corporations are subject to replacement tax, but do not pay Illinois income tax. The income tax is paid at the shareholder's level.' You must file Form IL-1120-ST if you are an S corporation that has net income or loss as defined under the Illinois Income Tax Act, OR is qualified to do business in Illinois and is required to file federal Form 1120S regardless of net income or loss. A QSSS is disregarded and its items are included on the parent's return.

Tax the entity still owes

The Personal Property Replacement Tax (PPRT) is 1.5% of net Illinois income for S corporations (C corporations pay 2.5%). This is a genuine entity-level tax that fully survives the S election and is separate from the shareholders' own Illinois income tax. Separately, the Illinois corporate franchise tax (805 ILCS 5/15.35) was NOT repealed — the 2019 phase-out was itself repealed in 2021 — but the exemption has been raised in steps: first $30 (2020), first $1,000 (2021–2023), first $5,000 (2024), and 'On and after January 1, 2025, the first $10,000 in liability is exempt' (Source: P.A. 103-592). Because the annual franchise tax rate is 1/10 of 1% (0.1%) of paid-in capital allocated to Illinois with a $25 minimum, a corporation would need roughly $10 million of Illinois paid-in capital before owing anything — effectively $0 for small S corps, though the annual report itself is still required. New for tax years ending on or after 12/31/2025, Illinois adopts the Finnigan apportionment method for unitary businesses.

Registering for payroll

Register with the Illinois Department of Revenue through MyTax Illinois (Form REG-1) for an income tax withholding account, and with the Illinois Department of Employment Security (IDES) for unemployment insurance. The employee completes Form IL-W-4. Withholding is reported on Form IL-941 with an annual Form IL-W-3 reconciliation; IDES uses the quarterly UI-3/40 contribution and wage report.

Annual filings

Form IL-1120-ST is due on or before the 15th day of the 3rd month following the close of the tax year (March 15 for calendar-year filers), with an automatic seven-month extension to FILE — but replacement tax, pass-through withholding and any elected PTE tax must all be paid by the original due date using Form IL-1120-ST-V. Pass-through withholding on behalf of nonresident shareholders is mandatory and is reported on Schedule B. Annual report (Form BCA 14.05) with the Illinois Secretary of State before the first day of the corporation's anniversary month, with a $75 fee plus franchise tax (usually $0 after the $10,000 exemption). Confirm the current fee with the Secretary of State before filing.

Pass-through entity tax

Yes — 4.95% of the taxpayer's calculated net income, electable by an S corporation for taxable years ending on or after December 31, 2021, with shareholders receiving an offsetting credit. MATERIAL 2026 UPDATE: the 'What's New' section of the IL-1120-ST instructions (R-07/26) states that 'The Illinois Income Tax Act was amended to remove the expiration date for the pass-through entity tax.' It is therefore no longer scheduled to sunset alongside the federal SALT cap. S corporations that elect PTE tax and reasonably expect total liability over $500 must make estimated payments on the 15th day of the 4th, 6th, 9th and 12th months using Form IL-1120-ST-V. PTE tax must be paid in full by the ORIGINAL due date even though an automatic filing extension applies.

The mistake owners make most often in Illinois

Assuming the S election eliminates Illinois entity-level tax. It does not — the 1.5% Personal Property Replacement Tax applies to the S corporation's net Illinois income and is completely separate from what the shareholders pay on their own returns. Owners who model only shareholder-level tax understate their true Illinois cost by 1.5% of profit every single year, which frequently swamps the modest federal savings on a small salary/distribution split. The common secondary trap is mandatory pass-through withholding for nonresident shareholders, which is easy to overlook and generates assessments against the corporation.

Filing your federal Form 2553

Businesses operating in Illinois send Form 2553 to the IRS Kansas City service center — fax 855-887-7734. Full address and filing checklist for Illinois.

Frequently asked questions

Does Illinois require a separate S-corporation election?

No. Illinois does not require a separate state election. Illinois automatically recognizes the federal Subchapter S election under IRC 1361(a); no separate Illinois election is required. But recognition does not mean no entity-level tax. Per IDOR, 'S corporations are subject to replacement tax, but do not pay Illinois income tax.

What tax does an S corporation pay in Illinois?

1.5% Personal Property Replacement Tax on net Illinois income; the corporate franchise tax still exists but the first $10,000 of liability is exempt from 1/1/2025.

Where do I file Form 2553 from Illinois?

With the IRS Kansas City service center. Fax 855-887-7734, or mail to Department of the Treasury, Internal Revenue Service, Kansas City, MO 64999.

What is the most common S-corp mistake in Illinois?

Compare with other states: Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine.

Sources

File your Form 2553 correctly

Scorply completes your federal election and includes a Illinois guide in your packet, so you know exactly what else you owe here.

Start my Form 2553

Researched from official Illinois sources and verified July 30, 2026. State tax rules change. This is general information, not tax advice — confirm with the state or a CPA before you rely on it.