Taxes for filing a new Subchapter S Corporation (“S Corp”) in Illinois
So you are thinking about starting a new business and filing as an S Corp in Illinois? Filing as an S Corp has its tax advantages, as you only pay employment taxes on the wages that the S Corp pays you as an owner employee, and you only pay income taxes on the profits of the S Corp.
One thing to consider as part of owning as S Corp rather than being treated as an employee, is that you will have to track your own payroll or pay someone else to handle payroll for you. Payroll employee tax administration can be tedious. Below is a breakdown of payroll taxes you will have to pay and payroll tax forms that have to be filed:
1. Quarterly Federal Employment Tax Withholdings – IRS Form 941: This quarterly tax form includes your quarterly federal income tax withholdings, as well as the employee and employer portion of Social Security and Medicare taxes. The employer and employee portion of Social Security taxes is 12.4% of gross wages, and the employer and employee portion of Medicare taxes is 2.9%. You have some leeway in terms of deciding how much in income taxes you withhold, but if you withhold too little in income taxes each quarter, you risk having to pay an underpayment of tax penalty at year end. These taxes can be paid via the IRS website EFTPS. Payroll providers online can handle payroll taxes for you but typically charge in the range of at least $40.00 USD per month.
2. Annual Federal Unemployment Tax (“FUTA”) – IRS Form 940: This is tax that has to be paid annually using IRS Form 940. The FUTA tax rate is 6.0%. The tax applies to the first $7,000 you paid to each employee as wages during the year. The $7,000 is often referred to as the federal or FUTA wage base. Your state wage base may be different based on the respective state’s rules. Generally, if you paid wages subject to state unemployment tax, you may receive a credit of up to 5.4% of FUTA taxable wages when you file your Form 940. If you're entitled to the maximum 5.4% credit, the FUTA tax rate after credit is 0.6%, so most employers in Illinois will only have to pay $42.00 USD per year on for this tax if Illinois Unemployment taxes are paid in full, on time, and the state isn't determined to be a credit reduction state, which Illinois is not. This tax can be paid via the IRS website EFTP
3. Quarterly State of Illinois Income Tax Withholdings – Illinois Form 941: For this tax, a quarterly a tax form IL-941 has to be filed with the State of Illinois, and can be paid at the MyTax Illinois website at https://mytax.illinois.gov. The annual State of Illinois income tax rate is currently 4.95%, so you can expect to withhold this amount from your wages for state income tax withholdings in Illinois. To avoid interest and penalties on withholdings, you must pay State of Illinois income tax withholding taxes monthly by making an IL-501 payment by the 15th of each monthly online at the MyTax Illinois website.
4. Quarterly State of Illinois Unemployment Insurance taxes – Currently, employers in Illinois must pay unemployment insurance taxes on the first $12,960.00 USD in wages for each employee. The standard contribution rate is currently 3.175%
When you add up all of the taxes listed above, your effective tax rate can easily come close to or over 30% of the wages that your S Corp pays to you as an employee. For that reason, it is good to determine a reasonable amount for your wages, and maximize the profits on your S Corp. Please contact us for any assistance you might need in determining your S Corp wages and taxes.