Illinois employer payroll taxes come in two pieces at the state level: unemployment insurance contributions paid entirely by the employer, and state income tax withheld from employee wages. For 2026, unemployment insurance runs from 0.750% to 7.050% on the first $14,250 of each employee’s wages, and income tax withholding is a flat 4.95% applied after exemption allowances. Both obligations begin with your first employee, and both have quarterly filing deadlines the state enforces strictly.
Unemployment Insurance Contributions
You become liable for Illinois unemployment insurance once you pay at least $1,500 in wages during any calendar quarter, or employ at least one person for any part of a day in each of 20 different weeks during a calendar year.1Illinois Department of Employment Security. Unemployment Taxes and Reporting The tax is paid entirely by the employer and cannot be deducted from an employee’s paycheck under any circumstances.2Illinois Department of Employment Security. Employer’s Contribution and Wage Reporting
Only the first $14,250 of each employee’s 2026 wages is subject to the tax.3Illinois Department of Employment Security. State Experience Factor and Employers’ UI Contribution Rates Anything you pay above that cap isn’t taxed for UI purposes.
Most new employers who became liable on or after January 1, 2024, pay a standard entry rate of 3.350% for 2026, which includes a 0.550% fund building surcharge. After three years of wage and claims history, the state assigns you an experience-based rate calculated from your specific benefit charges relative to your taxable payroll.4Illinois General Assembly. Illinois Code 820 ILCS 405/1506.1 – Determination of Employer’s Contribution Rate For 2026, experienced employer rates run from a low of 0.750% to a high of 7.050%.
You file Form UI-3/40 quarterly and pay contributions by April 30, July 31, October 31, and January 31, each covering the preceding calendar quarter.5Illinois Department of Employment Security. Quarterly Filing Requirements
State Income Tax Withholding
Every employer doing business in Illinois must withhold state income tax at a flat 4.95%.6Illinois General Assembly. Illinois Code 35 ILCS 5/701 – Requirement and Amount of Withholding There are no graduated brackets. Everyone’s wages are taxed at the same rate.
Employees claim their allowances on Form IL-W-4, the Illinois Withholding Allowance Certificate. For 2026, each basic personal exemption reduces taxable wages by $2,925 per year. The formula is 4.95% multiplied by wages minus the annualized value of exemptions, spread across pay periods.7Illinois Department of Revenue. Illinois Withholding Tax Tables If an employee doesn’t give you a completed IL-W-4, withhold at 4.95% with zero allowances.
How Often You Pay Withholding
Illinois assigns your payment frequency based on how much you withheld during the look-back period. The dividing line is $12,000.8Illinois Department of Revenue. Publication 131 – Withholding Income Tax Payment and Filing Requirements
- Monthly filers: first-time filers and anyone who withheld $12,000 or less in the look-back period. Payments on Form IL-501 are due by the 15th of the month following the month you withheld the tax.
- Semi-weekly filers: anyone who withheld more than $12,000. Payments are due Wednesday for taxes withheld the prior Wednesday through Friday, and Friday for taxes withheld the prior Saturday through Tuesday.
No matter which payment schedule you’re on, you file Form IL-941 quarterly by the last day of the month after each quarter ends: April 30, July 31, October 31, and January 31. IL-941 must be filed electronically.9Illinois Department of Revenue. 2026 IL-941 Illinois Withholding Income Tax Return A waiver is available through the Department of Revenue’s Taxpayer Assistance Division if you genuinely cannot file online.
Registering Before You Can File
You need two separate registrations: one with the Illinois Department of Revenue for withholding and one with the Illinois Department of Employment Security for unemployment insurance. Both start with a Federal Employer Identification Number from the IRS.10Internal Revenue Service. Get an Employer Identification Number
Register with the Department of Revenue by filing Form REG-1, the Illinois Business Registration Application, through the MyTax Illinois portal. Online registration typically processes within one to two business days, compared with four to six weeks by paper.11Illinois Department of Revenue. Business Registration You can also register with IDES through the same portal, and newly created businesses must register with IDES within 30 days of starting operations.12Illinois Department of Employment Security. Employer Tax Information The state issues you an Illinois tax account number for withholding and a separate UI account number. You’ll use both on every return and payment.
Reporting New Hires
Every new employee must be reported to IDES within 20 calendar days of their start date.13Illinois Department of Employment Security. New Hire Reporting This applies regardless of your size. You can submit through the IDES portal, by email, fax, or mail, or by sending a copy of the employee’s completed W-4 as long as the employer information is legible. The data feeds child support enforcement and UI fraud detection.
Employees Who Live in a Reciprocal State
Illinois has reciprocal income tax agreements with Iowa, Kentucky, Michigan, and Wisconsin. If your employee lives in one of those states but works in Illinois, you do not withhold Illinois income tax, provided the employee gives you a completed Form IL-W-5-NR.14Illinois Department of Revenue. Employee’s Statement of Nonresidence in Illinois – Form IL-W-5-NR Their wages are taxed by their home state instead. Employees who change their state of residence must notify you within ten days. Unemployment insurance is separate and still owed to Illinois on wages for work performed here.
Getting Employee Classification Right
All of the above assumes you’re paying employees. If you treat a worker as an independent contractor and Illinois decides they were really an employee, you owe the unpaid UI contributions and withholding retroactively, plus penalties and interest.
Illinois uses the ABC test under the Employee Classification Act. A worker is presumed to be an employee unless you can show all three of the following:15Illinois Department of Labor. Employee Classification Act FAQ the worker has been and will continue to be free from your direction over how the work is performed; the services are outside the usual course of your business; and the worker is engaged in an independently established trade, business, sole proprietorship, or partnership. Missing any one prong means the worker is an employee. In construction, misclassification penalties can reach $1,000 per violation on a first audit and $2,000 per repeat violation within five years, stacked on top of the back taxes owed.16Illinois Department of Labor. Employer Misclassification of Workers
Penalties for Late Filing and Payment
Illinois withholding penalties are tiered under the Uniform Penalty and Interest Act:17Illinois Department of Revenue. Publication 103 – Penalties and Interest for Illinois Taxes
- Late filing, first tier: the lesser of $250 or 2% of the tax due on the return, reduced by any timely payments already made.
- Late filing, second tier: if you still haven’t filed within 30 days of a nonfiling notice, an additional penalty equal to the greater of $250 or 2% of the tax due, capped at $5,000.
- Late payment, 1 to 30 days: 2% of the unpaid amount.
- Late payment, 31 or more days: 10% of the unpaid amount.
- After an audit begins: 15% of any amount still unpaid once the Department starts an investigation, rising to 20% if you don’t pay within 30 days of receiving an audit-prepared amended return.
Interest runs on top of these penalties at the federal underpayment rate as simple daily interest, adjusted every January 1 and July 1. On the UI side, IDES assesses its own penalties for late quarterly reports and late contributions. Waiver requests can be submitted through the MyTax Illinois portal,18Illinois Department of Employment Security. MyTax Illinois – Report and Pay Unemployment Insurance Taxes but approval isn’t guaranteed. The deadlines don’t move, so set calendar reminders the day you register.