Tax Law: Business This section discusses in general the types of taxes that a business owes, focusing on three main types: income taxes, sales and use taxes, and employment taxes. The rules are based on a combination of federal and Illinois laws.
Income taxes. All businesses, except for exempt businesses, such as nonprofits, must pay a federal and an Illinois tax on the income they generate, and they must file an annual return. The federal rate for corporations is.
How the tax is paid and who pays it depends upon the businesses structure. Corporations are a distinct legal entity
Sales and use taxes. Businesses are required to collect state sales and use taxes are on all sales, except for certain excepted goods, such as boats, planes, and mobile homes. The Illinois rate is 6.25% for general merchandise and 1% for specially designated goods, such as certain foods and medicine.
Chicago-area businesses and those in a couple of other areas also have to collect a mass transit tax that varies from 0.25% to 1%. Certain Chicago-area businesses also face a water commission tax of 0.25%. In addition, Illinois cities have the authority to impose local sales taxes and lodging taxes.
Employment taxes. Federal programs exist to provide a safety net for retirees and the unemployed. The money to support the programs is raised both from taxes imposed on businesses and from taxes imposed on workers' earnings. The federal laws impose an obligation on employers to withhold the taxes from their employees' paychecks and to pay the withheld amount to the federal government.
There are two types of taxes that fund the programs. The first is required by the Federal Insurance Contributions Act (FICA), which pays for Social Security and Medicare benefits. The other is the Federal Unemployment Tax Act (FUTA), which pays for unemployment benefits.
The FICA tax is 6.2% for Social Security and 1.45% for Medicare benefits for both employers and employees. Thus, employers are obligated to pay 6.2% and 1.45%, and they are required to withhold an additional 6.2% and 1.45% from employees' wages. The rate applies to gross wages, and the amount paid on the business's behalf is deductible as a business expense. The Social Security tax has a wage ceiling, so that above a certain amount no more tax is owed, while the Medicare tax has no ceiling.
The FUTA tax is 6.2% of the first $7,000 of wages. Wages above $7,000 are not taxed. Employers pay the tax; FUTA taxes are not withheld from employees' wages.
In addition, Illinois imposes a state unemployment tax of between 0.6% and 6.8%. Special rates apply for new and small employers. The tax applies to the first $9,000 of wages. As with the federal tax, the state tax is owed by the employer and is not withheld from employee wages. Credits against the federal tax are available for amounts paid to the state.
Some states impose an additional disability insurance tax, but Illinois does not.
Additional withholding. Employers are also required to withhold federal and state income taxes from employees' wages. Most employers are required to make periodic deposits for employees. The frequency of the deposits depends upon the amount withhold, with the higher amounts requiring more frequent deposits. Chicago businesses with at least 50 employees are subject to a local tax.
Self-employment tax. The self-employed also have to pay the equivalent of a FICA, although they have to pay double because they are both the employer and the employed. The Self-Employment Contributions Act (SECA) tax is 15.3%, which is composed of 12.4% for Social Security and 2.9% for unemployment. As with the FICA tax, the SECA tax has a ceiling for the Social Security portion of the tax. Similar to FICA, the one-half of the SECA tax is deductible as a business expense.