Understanding Chicago vs. Illinois taxes is important for any business operating in the city. While all Illinois businesses must comply with state tax requirements, companies located in Chicago may also be responsible for additional local taxes, fees, and licensing obligations, and having a clear understanding of both state and local tax liability can help reduce the risk of issues down the line. Here, we’ll provide more information on tax rates across the state, along with how outsourcing accounting services can help you remain compliant and organized throughout the year.
Quick Overview: Chicago vs. Illinois Taxes
✓ Illinois businesses may be subject to several state taxes, including corporate income tax, personal income tax, sales tax, employer withholding tax, unemployment insurance taxes, and the Personal Property Replacement Tax (PPRT).
✓ Chicago businesses often face additional local tax obligations, including higher sales tax rates, industry-specific taxes, licensing requirements, and commercial property tax considerations.
✓ Chicago’s combined sales tax rate is currently 10.25%, significantly higher than the state’s 6.25% base sales tax rate, making local compliance especially important for retailers and service providers.
✓ Commercial property owners in Chicago may face higher operating costs due to Cook County’s commercial property tax structure and property tax rates that exceed the national average.
✓ Strategic tax planning can help reduce tax liability, and working with a qualified tax professional can help businesses navigate Illinois and Chicago tax requirements while identifying potential savings opportunities.
What Taxes Do Businesses Pay in Illinois?
Every small business that operates in Illinois, regardless of whether it’s in the city or not, has to adhere to the state’s tax burdens. Some of the most common of these state-level taxes include the following:
- Corporate Income Tax (7.0%): C corporations doing business in Illinois pay a 7.0% state corporate income tax on taxable income.
- Personal Property Replacement Tax (PPRT): Illinois also imposes a replacement tax on business income. The flat rate is 2.5% for C corporations and 1.5% for partnerships and S corporations. For C corps, this is combined with the corporate income tax, resulting in an effective Illinois business tax rate of 9.5%.
- Pass-Through Entity (PTE) Tax (4.95%): Eligible partnerships and S corporations may elect to pay Illinois’ Pass-Through Entity Tax at a rate of 4.95%, allowing owners to potentially receive a federal deduction benefit.
- Individual Income Tax (4.95%): Sole proprietorships, single-member LLCs, and other pass-through entities generally report business income on the owner’s personal tax return, which is subject to Illinois’ flat 4.95% individual income tax rate.
- Sales and Use Tax (6.25% State Rate): Businesses selling taxable products must collect Illinois sales tax. The statewide base rate is 6.25%, although local taxes may increase the total rate paid by customers.
- Employer Withholding Tax: Businesses with employees must withhold Illinois income taxes from employee paychecks and remit those funds to the state. The withholding rate generally aligns with the state’s 4.95% individual income tax rate.
- Unemployment Insurance (UI) Tax: Employers must contribute to Illinois’ unemployment insurance program. Rates vary based on factors such as industry, payroll history, and claims experience, so there is no single statewide rate that applies to all employers.
- Excise Taxes: Businesses involved in industries such as fuel, tobacco, alcohol, cannabis, and certain regulated products may owe additional state excise taxes.
- Industry-Specific Fees and Licensing Costs: Depending on the type of business, Illinois may require permits, registrations, or professional licenses that carry additional fees.
Does Chicago Have Additional Business Taxes?
Yes, businesses operating within the city limits of Chicago are subject to additional taxes and fees beyond what’s required by the State of Illinois. In fact, the City of Chicago has its own tax structure. One of the most notable differences is the local sales tax rate. Chicago has one of the highest sales tax rates in the country, and businesses selling taxable goods within city limits must collect the combined state, county, regional, and city sales taxes from customers. This 2026 combined rate is currently set at 10.25%, which is broken down as follows:
- State of Illinois: 6.25%
- Cook County: 1.75%
- City of Chicago: 1.25%
- Regional Transportation Authority (RTA): 1.00%
However, it’s expected that the RTA tax will rise from 1% to 1.25% in Cook County beginning June 2026.
Additional Taxes Imposed by Chicago’s Local Government
Businesses in Chicago typically have different taxation requirements based on the industry. Depending on the type of business you operate, you may also be responsible for taxes such as:
- Chicago Amusement Tax: Applies to entertainment activities, including certain sporting events, recreational activities, and some digital entertainment services. The average rate varies widely based on the activity, but a breakdown can be found here.
- Personal Property Lease Transaction Tax: Often applies to equipment rentals, leased property, and certain cloud-based software and technology services. As of 2026, this is 15% of receipts or charges for all leases, including the non-possessory lease of a computer to input, modify, or retrieve data supplied by the customer.
- Hotel Accommodation Tax: Paid by hotels, short-term rentals, and other lodging providers operating within the city. Its current base rate is 4.5% of the gross rental or leasing charge. And, for hotels with 100 rooms or more located in the Tourism Improvement District (TID), a 1.5% TID transactions charge is added to the 4.5% base rate.
- Restaurant and Food Service Taxes: Food and beverage businesses may be subject to additional local taxes and fees depending on their operations. The tax base for this is 0.5% of the selling price.
- Ground Transportation Taxes: Certain transportation providers, including rideshare and taxi services, may be subject to city-specific taxes. The rates depend on several factors, including congestion zones, and can be found here.
Some of these tax burdens are passed on to the customer and are reflected in the purchase price or added at the point of sale. However, it’s typically up to the business owner to collect and remit the taxes to the City of Chicago and the State of Illinois.
It’s also important to note that these types of taxes may also be applicable to businesses outside of Chicago, depending on local laws and regulations. However, the rate is often different and may be less when compared to Chicago. To better understand your legal liabilities and how much to set aside for business taxes, it’s important to work with a tax professional knowledgeable in your local tax code and any exemptions that are available.
Chicago’s Effective Property Tax Rate
If your business operates on commercial real estate within the Chicagoland area, you’ll also be responsible for property taxes. Due to the cost, these can represent a significant operating expense, so it’s important to consider each tax year. Cook County has some of the highest commercial property tax burdens in Illinois. Commercial properties are generally assessed at a higher percentage of their market value than residential properties, which can result in substantially larger tax bills for business owners.
The median can vary depending on each municipality, but it’s then subject to a state equalization factor and local tax rates for the final combined state and local tax bill. As a result, commercial property tax rates in Chicago averaged about 4.08% of the property value, in comparison to the national average of around 1.81%.
Tax Planning Strategies for Illinois and Chicago Businesses
While understanding your tax obligations is important for running your business, proactive tax planning can make a significant impact on your overall tax liability. Some tips to help reduce your tax burden and operate more efficiently within the City of Chicago include the following:
Choose the Right Business Structure
Your business structure directly affects how your income is taxed. Sole proprietorships, partnerships, LLCs, S corporations, and C corporations each have different tax implications at both the federal and state levels. Choosing the right entity can help minimize taxes and support your long-term business goals. As your company grows, it may also be worth reevaluating whether your current structure is still the most advantageous option.
Understand Available Tax Credits and Incentives
Depending on your industry and location, you may qualify for credits that reduce your state tax liability. Many businesses miss out on these opportunities simply because they’re unaware they exist, making it important to review available programs regularly. You can find more information on some of the most impactful tax credits and incentives here.
Work With a Tax Professional
Tax laws and filing requirements can be complex, especially for businesses navigating both Illinois and Chicago tax regulations. To help you maximize cost savings, the team at Del Real Tax provides financial coaching, business accounting and bookkeeping, tax return preparation, and more to help you stay compliant and make more informed financial decisions. Contact us today to learn more about how our team can help you navigate state and local taxes.
