Guide

S corp vs LLC: how each is taxed in Illinois

People often treat “S corp” and “LLC” as two separate choices. They are not. An LLC is a legal entity. An S corporation is a way of being taxed. This page sets out how a default one-owner LLC and an LLC with an S election are treated, with sources.

The short version

• An LLC is a legal structure. An S corporation is a federal tax election. An LLC that qualifies can elect S corporation tax treatment and is still an LLC under Illinois law.
• A one-owner LLC with no election is disregarded for income tax. Its profit is reported on the owner’s personal return, and the owner pays self-employment tax on it. There is no payroll for the owner.
• An LLC with an S election files its own return (Form 1120-S). The owner who works in the business is an employee and is paid wages with payroll taxes. Profit left in the company passes through to the owner’s return.
• This page lays out how each is treated under federal and Illinois rules, with sources. It does not say which one is right for any person.

One thing worth stating clearly

Wages from an S corporation are taxed at the same federal income tax rates as other income. The difference between the two structures is in the payroll tax side: self-employment tax applies to the owner’s net earnings in a default LLC, while in an S corporation payroll tax applies to the owner’s wages. The IRS says non-wage distributions are not subject to employment taxes only to the extent they are not payment for the owner’s services.

How a default one-owner LLC is taxed

• Federal income tax: the IRS treats a single-owner LLC as a disregarded entity by default. Income and expenses go on Schedule C of the owner’s Form 1040.
• Self-employment tax: 15.3%, made up of 12.4% Social Security and 2.9% Medicare. It is figured on 92.35% of net earnings (Schedule SE, line 4a). The Social Security part applies only up to the annual wage base, which is $184,500 for 2026. Medicare has no cap, and an additional 0.9% Medicare tax applies above certain income levels. The employer-equivalent part of the tax is deductible for income tax.
• Illinois income tax: the owner pays the Illinois individual income tax, a flat 4.95% of net income, on Form IL-1040.
• Illinois replacement tax: the Illinois Department of Revenue lists corporations, S corporations, partnerships, trusts and public utilities as payers. It does not list default one-owner LLCs.
• Payroll: none for the owner. IDES says that for a member manager taxed as a sole proprietor or partner, wages are not subject to unemployment insurance contributions.

How an LLC with an S election is taxed

• Eligibility: no more than 100 shareholders, generally individuals, estates or certain trusts; no nonresident alien shareholders; one class of stock.
• The election: an eligible LLC files Form 2553. The IRS instructions say it must be filed no more than 2 months and 15 days after the start of the tax year the election takes effect, or at any time during the prior tax year. An LLC that meets the S corporation tests does not also need Form 8832. Late-election relief exists in limited cases, generally within 3 years and 75 days of the effective date.
• Federal return: the company files Form 1120-S and issues a Schedule K-1. Income passes through to the owner’s Form 1040.
• Officer wages: the IRS treats corporate officers as employees for FICA, FUTA and income tax withholding, even when they are also shareholders. S corporations must pay reasonable compensation to a shareholder-employee for services. The IRS can reclassify distributions as wages. Factors include training, duties, time devoted and what comparable businesses pay.
• Payroll taxes on wages: Social Security is 6.2% from the employee and 6.2% from the employer; Medicare is 1.45% each (15.3% in total). The Social Security wage base is $184,500 for 2026. The employer also owes federal unemployment tax (FUTA): 6.0% of the first $7,000 of each employee’s wages, reduced by up to 5.4% for state unemployment tax paid on time, which is an effective 0.6% when the full credit applies.
• Illinois unemployment insurance: a new employer registers with IDES within 30 days of start-up. IDES says wages of a member manager of an LLC that elected S corporation treatment are subject to contributions.
• Illinois income tax: the owner pays the same 4.95% Illinois individual income tax on income reported from the company.
• Illinois replacement tax: S corporations pay 1.5% of net income and file Form IL-1120-ST.
• Health insurance: the IRS says premiums paid for a more-than-2-percent shareholder-employee are reported as wages subject to income tax withholding, and generally not subject to FICA or FUTA under a plan covering employees.
• QBI deduction: the qualified business income deduction is up to 20% of qualified business income. The IRS says wages as an employee do not qualify.

Side by side

A worked illustration of the calculations

The figures below are hypothetical. They show how the rules above are applied, not what any person would owe or what any person should do. The salary amount is invented: reasonable compensation is a facts-and-circumstances question that the IRS evaluates, not a formula. The illustration leaves out federal and Illinois income tax, the QBI deduction, the deduction for half of self-employment tax, Illinois unemployment contributions (the rate is assigned by IDES), and the cost of payroll and extra returns.

Assume the business earns $90,000 of net profit before any owner pay.

The replacement tax base is Illinois net income as defined on Form IL-1120-ST, which has its own additions and subtractions, so the last line is only an approximation. Illinois income tax is a flat 4.95% under either structure, applied to the owner’s net income as reported on the owner’s return.

What this page does not cover

• Which structure produces a better result for any person. That depends on facts this page does not have and is a question for a CPA or tax professional.
• What salary is reasonable for a particular business.
• Retirement plans, other owner benefits, and how other states tax a seller who sells across state lines.

Neither structure changes your Illinois sales tax duties or your use of the CRT-61.

Questions you could bring to a professional

• How would each structure apply to my actual numbers?
• What would counting my work as a reasonable salary look like for my business?
• How would the election interact with my QBI deduction, health insurance and retirement savings?
• What is the deadline to elect, and what happens if circumstances change?

I am not a CPA or an attorney

This page is general educational information drawn from the sources listed below. It is not legal, tax or accounting advice, and it does not recommend an election. Flipfiled helps you complete and submit registration paperwork. It does not do tax work: no tax returns, no payroll, and no tax advice. Rules and rates change, so confirm with the agency or a professional.

Sources: IRS, S corporation compensation and medical insurance issues; IRS, S corporation employees, shareholders and corporate officers; IRS, Instructions for Form 2553; IRS, LLC filing as a corporation or partnership; IRS, Topic no. 407, Business income; IRS, Self-employment tax; IRS, Topic no. 751, Social Security and Medicare withholding rates; IRS, Topic no. 759, Form 940 (FUTA); IRS, Qualified business income deduction; SSA, Contribution and benefit base; Illinois Department of Revenue, Personal property replacement tax; IRS, Schedule SE (Form 1040), 2026 draft; Illinois Department of Revenue, Income tax rates; Illinois Department of Revenue, Individual income tax (sole proprietorships); IDES, Exemption for LLC owner; IDES, Are you a new employer?. Checked Oct 28, 2026.