Illinois Contractor Taxes and Licensing: Use Tax, Service Occupation Tax and State Licenses

Illinois treats construction contractors as end users of the materials they incorporate into real property, so they owe tax on their cost and don't charge sales tax on the contract. Repair work is different: servicemen owe service occupation tax on parts, but the service labor itself remains nontaxable. The state rate is 6.25%, plus local taxes.

Do contractors charge sales tax in Illinois?

Not on construction contracts. The Illinois Department of Revenue's audit manual says "construction contractors are deemed end users of tangible personal property purchased for incorporation into real property," and "as end users of such tangible personal property, contractors incur Use Tax liability for such purchases based upon the cost price." The same chapter notes construction contracts fall under the retailers' occupation and use taxes, "but not State or local Service Occupation Tax."

In practice: you pay tax when you buy materials, or self-assess use tax if the seller didn't charge it, and the customer's construction invoice has no sales tax line. That's like Wisconsin and Missouri. What makes Illinois distinctive is what happens on repair and service calls.

Repair and service work: Illinois service occupation tax

Illinois taxes service work through its service occupation tax (SOT), and only the parts are taxed. IDOR Publication 113-SOT says "the service component of a sale of service remains nontaxable. The only part of a sale of service that is taxable is the" transfer of tangible personal property. A serviceman can pay tax in one of these ways:

• SOT on the selling price of the parts transferred to the customer;
• "SOT on 50%, but not less than the cost price, of the Serviceperson's entire bill"; or
• if they qualify as a de minimis serviceperson, SOT or use tax on the cost price of the parts.

Which method applies depends on how you bill and how much of your revenue comes from parts. Publication 113-SOT walks through each, and the governing rule is 86 Ill. Adm. Code 130.2075. Get your CPA's help choosing; picking the wrong one is an easy way to over- or under-collect. The sales tax on labor vs. materials guide shows how unusual this approach is.

Illinois sales tax rates and use tax on materials

Publication 113-SOT cites "the statewide general merchandise tax rate of 6.25 percent," with local taxes on top: home-rule and non-home-rule municipal taxes, county taxes, and Regional Transportation Authority and Metro-East transit taxes. Local rates change on January 1 and July 1. The July 1, 2026 bulletin shows combined general merchandise rates such as 10.00% in Glencoe and Winnetka and 10.50% in Schiller Park. Use the MyTax Illinois tax rate finder for an address.

Because construction contractors owe use tax on materials they incorporate, an out-of-state purchase that wasn't taxed means you owe Illinois use tax yourself. More on how that works: use tax for contractors.

Illinois contractor licensing

Illinois licenses two building trades at the state level. The Illinois Department of Public Health (IDPH) says people who plan, install, alter or repair plumbing "must be licensed," and "all plumbing contractors must register with the state and pay an annual fee," with general liability, bodily injury, property damage and workers' comp insurance. The Department of Financial and Professional Regulation (IDFPR) licenses roofers under the Roofing Industry Licensing Act.

IDFPR's limited roofing license covers "residential roofing, including residential properties consisting of 8 units or less," and the unlimited license covers "residential, commercial and industrial." The application needs a bond, an insurance form, proof of workers' comp and a $125 fee. For an overview of state vs. local licensing, read contractor license.

Illinois income and replacement taxes

Illinois has a flat individual income tax: "4.95 percent of net income," effective July 1, 2017. Corporations pay "7 percent of net income." On top of that, Illinois charges a personal property replacement tax on business income: "2.5 percent" for corporations other than S corporations, and "1.5 percent" for partnerships, trusts and S corporations. That replacement tax surprises many owners who form an S corp or multi-member LLC; build it into your entity decision with your CPA.

Owners without withholding generally make quarterly estimated payments to the IRS and Illinois. See quarterly estimated taxes for contractors and the quarterly estimated tax calculator.

Workers' comp in Illinois

The Illinois Workers' Compensation Commission says "if you have one employee, even a part-time employee, you must obtain workers' compensation insurance," with rare exceptions under Section 3 of the Act. For construction businesses, the commission points to the Employee Classification Act and says coverage is required "in almost all instances." Sole proprietors "may elect to come under the Act or they may choose not to." Both the IDPH plumbing registration and the IDFPR roofing license also ask for proof of coverage. Background: workers' compensation.

Local taxes in Illinois

Local sales taxes push combined rates above 10% in some Chicago-area towns, and they change twice a year. Construction contractors feel this through the use tax on materials; servicemen feel it on the SOT they charge. Home-rule cities can also levy their own taxes and license fees, so check with each city you work in.