S-Corp Election in Illinois: Form 2553 Guide (2026)

Fact-checked by the LegalGlass editorial team against primary sources · Published Aug 20, 2026 · Last updated Aug 20, 2026

An S-corp election in Illinois is made on IRS Form 2553, not with the Secretary of State. There is no IRS fee, the deadline is two months and 15 days into the tax year, and Illinois then taxes the entity on Form IL-1120-ST with a 1.5% replacement tax.

Quick Answer

What it is: A federal tax election on IRS Form 2553 - not an Illinois entity type
IRS fee: $0 - the election itself is free
Deadline: 2 months and 15 days after the start of the tax year (about March 15 for calendar-year filers)
Late relief: Rev. Proc. 2013-30 reasonable-cause relief, claimed on Form 2553
Illinois return: Form IL-1120-ST, plus Schedule K-1-P to each owner
Illinois entity tax: 1.5% personal property replacement income tax on net income
Federal return: Form 1120-S with Schedule K-1
Payroll: Required - owner-employees must take reasonable W-2 compensation

What the S-Corp Election Actually Is in Illinois

An S-corp election is a federal tax election, not a Illinois business structure. You do not form an "S corporation" with the Secretary of State. You first create an LLC or a corporation under state law, then ask the IRS to tax that existing entity under Subchapter S by filing Form 2553, Election by a Small Business Corporation. The election is authorized by 26 U.S.C. 1362(a).

For an LLC, the election layers on top of the entity-classification rules in 26 CFR 301.7701-3. A single-member LLC that elects S status stops being a disregarded entity for income tax; a multi-member LLC stops being a partnership. In both cases the LLC keeps its state-law identity: the same articles, the same registered agent, and the same limited-liability protection.

Because the election is federal, filing it does not change any Illinois registration you already hold, and it does not create a second entity. What changes is how profit reaches your personal return and how much of that profit is exposed to self-employment tax.

Eligibility Requirements Under 26 U.S.C. 1361

Not every business can elect S status. Under 26 U.S.C. 1361(b), a small business corporation must be a domestic entity, have no more than 100 shareholders, have only individuals, estates, and certain trusts and tax-exempt organizations as shareholders, have no nonresident-alien shareholders, and have only one class of stock.

The one-class-of-stock rule is where LLCs most often run into trouble. If your operating agreement gives some members a preferred return, a liquidation preference, or distributions that do not track ownership percentages, the IRS may treat that as a second class of stock and the election fails. Before electing, read your operating agreement and conform the distribution provisions to strict pro-rata treatment.

Partnerships, other corporations, and most non-grantor trusts cannot hold an interest in an S corporation. A holding structure that works well for a partnership frequently disqualifies the same business from Subchapter S, so check ownership before you file rather than after.

The Form 2553 Deadline

The statutory deadline in 26 U.S.C. 1362(b) is precise: to take effect for a tax year, Form 2553 must be filed no later than two months and 15 days after the beginning of that tax year, or at any time during the preceding tax year. For a calendar-year business, that is generally March 15.

A newly formed entity measures the window from the earliest of the date it first had shareholders, first had assets, or first began doing business - not from the date the state stamped its formation document. A Illinois LLC that organizes in January but does not open a bank account or take revenue until March starts its clock at the earliest of those events.

A late election is not automatically fatal. Revenue Procedure 2013-30 gives simplified relief when the only reason S status was not effective is the missed deadline, the entity intended to be an S corporation from the requested date, everyone reported consistently, and reasonable cause exists. You claim relief by writing the reasonable-cause statement directly on Form 2553.

How to File Form 2553

Form 2553 is filed on paper - by mail or fax - with the IRS service center that serves Illinois. There is no IRS fee to make the election. Every shareholder or member must consent in Part I, and married owners in a community-property arrangement generally both sign.

The IRS normally responds with a CP261 notice confirming acceptance, typically within about 60 days. Keep that notice permanently: banks, lenders, payroll providers, and future buyers ask for it, and the IRS will not reissue it casually. If no notice arrives, follow up before you file the first Form 1120-S.

Step	What it involves	Authority
1. Confirm eligibility	Domestic entity, one class of stock or membership interest, 100 or fewer shareholders, all eligible U.S. individuals, estates, or qualifying trusts	26 U.S.C. 1361
2. Get an EIN	Free from the IRS; Form 2553 cannot be processed without one	IRS Form SS-4
3. Obtain consents	Every shareholder or LLC member must sign the election	26 U.S.C. 1362(a)(2)
4. File Form 2553	Mail or fax to the IRS service center for Illinois; there is no IRS filing fee	IRS Form 2553
5. File annually	Form 1120-S plus a Schedule K-1 to each owner	IRS Form 1120-S

How Illinois Treats the S-Corp Election

Illinois does not require a separate state-level S election. The Illinois Department of Revenue follows the federal classification, so once the IRS accepts Form 2553 the entity files as an S corporation in Illinois too, on Form IL-1120-ST.

The catch that surprises new Illinois S corporations is the personal property replacement income tax. Illinois imposes replacement tax at 1.5% of net income on S corporations and partnerships - an entity-level tax that a sole proprietorship does not pay. Individual Illinois income tax remains 4.95% of net income on the owner's share.

That 1.5% replacement tax is a genuine cost of the election in Illinois and should be netted against the federal self-employment tax savings before you decide. It applies to the entity's Illinois net income regardless of how much you pay yourself in wages.

Illinois Filings That Continue After the Election

The election changes nothing at the Illinois Secretary of State. Your LLC still files its Illinois annual report, still maintains an Illinois registered agent, and still appears in the Illinois business entity search under the same file number.

On the tax side you add Form IL-1120-ST, Schedule K-1-P for each owner, replacement-tax payments, and - because you now run payroll - Illinois withholding registration and Illinois unemployment insurance with IDES. See Illinois LLC tax filing for the full annual calendar.

Reasonable Compensation and Payroll

The entire point of the election is that only wages, not the full profit, carry employment tax. That is also its main compliance burden. An owner who works in the business must be on payroll at reasonable compensation - what an unrelated employer would pay for the same work - before any distribution is taken.

In practice this means registering for federal employment taxes, filing Form 941 quarterly and Form 940 annually, issuing yourself a W-2, and registering for Illinois withholding and unemployment insurance. Payroll service fees, extra tax preparation, and a separate business return are real annual costs that offset part of the savings.

The IRS has litigated and won many cases where an owner took a token salary and large distributions. If the salary is unreasonably low, the IRS recharacterizes distributions as wages and adds employment tax, interest, and penalties. Document how you set the number - comparable pay data, hours worked, duties - and revisit it each year.

When the Election Saves Money

Default LLC taxation exposes essentially all net profit to self-employment tax at 15.3% - 12.4% Social Security up to the annual wage base, plus 2.9% Medicare with no cap. Under Subchapter S, only the W-2 wage is subject to Social Security and Medicare tax; the residual profit passes through free of employment tax.

The savings therefore equal roughly 15.3% of the profit you can defensibly leave out of wages, minus payroll and accounting costs. As a rough planning rule, the election starts to pay for itself once net profit meaningfully exceeds reasonable compensation - often somewhere in the mid five figures - but the honest answer depends on your salary benchmark, not on a threshold from a blog post.

The election also has costs that do not show on a spreadsheet: a separate return with an earlier due date, stricter basis and distribution rules, and less flexibility in allocating income among owners. Compare the whole picture using our S-corp vs LLC guide and the self-employment tax calculator.

Common Mistakes to Avoid

The four failures we see most often are filing Form 2553 after the deadline without invoking Rev. Proc. 2013-30 relief; electing before obtaining an EIN, which stalls processing; leaving non-pro-rata distribution language in an operating agreement and creating a second class of stock; and skipping payroll entirely while still taking money out of the business.

A fifth mistake is treating the election as permanent. Revocation requires the consent of shareholders holding more than half the shares and, once revoked or terminated, the IRS generally will not allow a new S election for five tax years without consent. Elect deliberately, not experimentally.

Frequently Asked Questions

How do I make an S-corp election in Illinois?

File IRS Form 2553 with the federal service center that serves Illinois. There is no separate Illinois election and no IRS fee. You need an EIN first, and every shareholder or LLC member must sign the consent. Illinois follows the federal classification, so acceptance of Form 2553 makes the entity an S corporation for Illinois purposes as well.

What is the deadline for Form 2553 in Illinois?

Form 2553 must be filed no later than two months and 15 days after the beginning of the tax year the election takes effect, or any time during the preceding tax year. For calendar-year businesses that is about March 15. A new entity measures the window from the earliest date it had shareholders, had assets, or began doing business.

Does Illinois tax S corporations?

Yes, at the entity level. Illinois imposes the personal property replacement income tax at 1.5% of net income on S corporations and partnerships. The owners then pay Illinois individual income tax at 4.95% on their distributive share. The replacement tax is a real cost of the election that Illinois sole proprietors do not pay.

What form does an Illinois S corporation file?

An Illinois S corporation files Form IL-1120-ST, the Small Business Corporation Replacement Tax Return, with the Illinois Department of Revenue, and issues Schedule K-1-P to each owner. Federally it files Form 1120-S with a Schedule K-1 for each shareholder. Both are annual returns separate from the owner's personal return.

Can I fix a late Illinois S-corp election?

Often yes. Revenue Procedure 2013-30 provides simplified late-election relief when the entity intended to be an S corporation from the requested date, failed to qualify only because Form 2553 was late, has reasonable cause, and all parties reported consistently. You attach the reasonable-cause statement to Form 2553 rather than filing a private letter ruling request.

Do I have to run payroll after electing S-corp status?

Yes, if you work in the business. An owner-employee must receive reasonable W-2 compensation before taking distributions. That means federal employment tax deposits, Forms 941 and 940, a W-2, and Illinois withholding and unemployment registration. Payroll and extra return preparation are the recurring costs that offset the self-employment tax savings.

Sources

IRS - About Form 2553, Election by a Small Business Corporation (election form and instructions; no filing fee).
IRS - S Corporations (who may elect; annual filing obligations).
IRS - About Form 1120-S (annual S corporation return and Schedule K-1).
IRS - S Corporation Compensation and Medical Insurance Issues (reasonable compensation).
IRS - Self-Employment Tax (15.3% combined rate; 12.4% Social Security and 2.9% Medicare).
IRS - Get an Employer Identification Number (EIN is free).
Illinois Department of Revenue - Income Tax Rates (1.5% replacement tax on S corporations and partnerships; 4.95% individual rate).
Legal Information Institute (Cornell) - 26 U.S.C. 1362 (election, deadline, revocation).
Legal Information Institute (Cornell) - 26 U.S.C. 1361 (eligibility; one class of stock).
Legal Information Institute (Cornell) - 26 CFR 301.7701-3 (entity classification for LLCs).

LegalGlass provides general information for educational purposes and is not legal advice, is not a law firm, and is not a substitute for advice from a licensed attorney or tax professional. Laws, fees, and thresholds change; verify current amounts with the IRS and the Illinois Department of Revenue before acting.