An S-corp election for an Illinois LLC

Electing and paying yourself

The LLC elects S-corp tax status with IRS Form 2553. The owner becomes an employee and must receive reasonable compensation before taking non-wage distributions.

The IRS publishes no salary formula. Benchmark compensation to what the same work would pay someone else.

The added filings

• Quarterly federal payroll returns on Form 941 and W-2s.
• Illinois withholding on Form IL-941, and possibly an IDES unemployment account.
• An annual federal Form 1120-S and Illinois Form IL-1120-ST.

See employee and payroll obligations and the tax calendar.

Illinois taxes change the calculation

An S-corp pays Illinois Personal Property Replacement Tax of 1.5% on the entity’s net income. A disregarded single-member LLC does not pay this tax. The added tax partly offsets payroll-tax savings.

Partnerships and S-corps may optionally elect the Illinois pass-through entity tax at 4.95%. Owners receive a matching credit, which can help with the federal SALT deduction cap. Ask a CPA whether this fits your situation.

When is the extra work worth it?

Rule of thumb, not an official threshold: accountants commonly start the conversation when net profit consistently runs around $40,000 to $80,000 or more.

Estimate: added payroll and tax-preparation costs often run $1,500 to $3,000 or more a year.

Compare the alternatives on sole proprietorship vs LLC.

Not sure which structure fits? Try the Structure Finder, or request help. Call (331) 261-4788

Before making the election, have a CPA run the numbers for your business, including reasonable salary, Illinois taxes, and the added annual costs.