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A 9.5% combined corporate rate, plus Chicago’s own wage, leave and 15% cloud tax

Setting up a startup in Illinois

Illinois taxes a corporation’s income twice over — a 7% income tax plus a 2.5% replacement tax — and still charges a franchise tax on capital. Most of the work a small company feels, though, comes from Chicago, which sets its own minimum wage, its own paid leave and sick leave, and a 15% tax on cloud software the state itself leaves alone.

Areas
6
Setup steps
8
Checked
October 13, 2026
Illinois, raised. Point at a neighbor to compare; click to open its guide.

At a glance

Corporate tax
7% + 2.5% replacement tax
Tax on wages
4.95% flat
Sales tax
6.25% + local
Economic nexus
$100,000 in sales
Minimum wage
$15.00/hr (Chicago $17.05)
UI wage base
$14,250
New-employer UI rate
3.35%
Paid leave program
None
Annual report
Before anniversary month; $75 + franchise tax

2026 figures, each explained with its source on the area’s page. On top of the federal baseline.

Setup, in order

  1. Qualify the corporation with the Secretary of State

    Before you hire, lease space or sign customers in Illinois

    File an application for authority with the Secretary of State ($150) and pay initial franchise tax on the capital attributed to Illinois.

  2. Register with IDOR

    Before the first Illinois payroll

    Register on MyTax Illinois for withholding (Form IL-941) and, if you have nexus, sales and use tax. New registrants start monthly-pay, quarterly-file.

  3. Open an IDES unemployment account

    When you first pay Illinois wages

    Open an unemployment insurance account with IDES. For 2026 the new-employer rate is 3.35% on the first $14,250 of each employee’s wages.

  4. Report new hires and contractors

    Within 20 days of the start date

    Report each new hire and each independent contractor to the IDES new-hire directory.

  5. Adopt a paid leave policy

    From the first day of employment

    Write a policy for 40 hours of paid leave under the Paid Leave for All Workers Act, or Chicago’s 40 hours of paid leave plus 40 of paid sick leave for staff working in the city.

  6. Register for Chicago’s lease tax

    Before billing a Chicago customer

    If any customer uses your software in Chicago, register with the Chicago Department of Finance to collect the 15% Personal Property Lease Transaction Tax.

  7. Buy workers’ compensation coverage

    Before the first employee starts

    Illinois requires every employer to carry workers’ compensation insurance from the first employee.

  8. Retirement: My Illinois Savings or a plan

    After two years in business with 5+ employees

    Once you have had five or more Illinois employees in every quarter of a year and been in business two years, register for My Illinois Savings or offer a qualified plan.

The six areas

Who you register with

Hiring across the border

An employee who lives in one state and works in another is the most common way a startup ends up registered in two. These are Illinois’s neighbors.

Common questions

Is the Illinois corporate rate 7% or 9.5%?

Both. The 7% income tax and the 2.5% personal property replacement tax are computed on the same Illinois base income and reported together on Form IL-1120, so the effective state rate on a C corporation’s Illinois income is 9.5%. The replacement tax is a separate line, and some credits offset only one of the two.

Is our SaaS taxable in Illinois?

At the state level, generally not: Illinois doesn’t tax software accessed remotely that the customer never downloads. Chicago is different. The city’s Personal Property Lease Transaction Tax, 15% from January 1, 2026, applies to nonpossessory computer leases used in Chicago, and the lessor is expected to collect it from Chicago customers.

Do we file our 1099-NECs with Illinois?

Not as a general rule. IDOR’s Publication 110 makes filing 1099s with Illinois withholding voluntary, through MyTax Illinois or FIRE, and a startup paying contractors usually withholds no Illinois tax. Contractors still go on the IDES new-hire report.

Our first hire is in Chicago. Which paid leave law applies?

Chicago’s. A Chicago employer is covered by the Chicago Paid Leave and Paid Sick and Safe Leave Ordinance, which gives up to 40 hours of paid leave and 40 hours of paid sick leave a year, accrued at one hour per 35 worked. Employers covered by a local ordinance like Chicago’s are outside the state Paid Leave for All Workers Act; everyone else in Illinois gets 40 hours under the state law.

What is the Illinois franchise tax, and will we owe it?

It is a tax on the paid-in capital the Secretary of State attributes to Illinois, collected with the annual report. Since January 1, 2025 the first $10,000 of liability each year is exempt, which takes most early-stage companies to zero franchise tax; the $75 annual report fee is still due.

Is the Illinois R&D credit worth anything to a pre-revenue startup?

It reduces Illinois income tax for research conducted in Illinois, at 6.5% of the increase in qualifying expenses over the average of the prior three years. It is not refundable, so a pre-revenue company only banks it; unused credit carries forward five years. The administrative rule lets it be claimed for tax years ending before January 1, 2032.

Works in your QuickBooks Online or Xero file

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Sources

Checked against each agency’s own page on . Rates and thresholds change, usually on January 1.

General information for US companies, not tax, legal or accounting advice for yours. Rules and thresholds change; confirm the specifics with a CPA or the agency before you act on them.