Illinois Payroll: Withholding, Unemployment Insurance and New-Hire Reporting

Illinois payroll puts three agencies and several clocks on every employer in Aurora, Naperville, Batavia and the rest of the Fox Valley: the Illinois Department of Revenue (IDOR) for income tax withholding, the Illinois Department of Employment Security (IDES) for unemployment insurance (UI) and the state New Hire Directory. If you hire H-1B, L-1, TN or OPT staff, or run the Illinois arm of an Indian or Canadian company, the same filings apply, with a few visa-specific twists on Social Security taxes. This guide shows what to register, withhold, file and report.

Who must set up Illinois payroll?

Generally you withhold Illinois income tax if you must withhold federal income tax from employee compensation paid in Illinois. For UI, most for-profit employers become liable once they pay $1,500 in wages in a single calendar quarter or employ one or more persons in 20 different weeks of a calendar year. Household employers who pay $1,000 or more in cash wages in a quarter for domestic work are liable, and nonprofits become liable when they employ four or more people in each of 20 weeks. A household employer can pay Illinois withholding through Form IL-1040. If you have five or more employees, have been in business two or more years and offer no qualified retirement plan, the Illinois Secure Choice program requires you to offer a plan or enrol employees automatically.

How to set up Illinois payroll, step by step

1. Get a federal EIN and decide on a payroll provider or in-house process.
2. Register in MyTax Illinois. Choose "Register a New Business (Form REG-1)," add withholding, and register with IDES from the same site. Online processing takes about one to two business days. Register before you hire.
3. Collect forms from each new employee: federal Form W-4, Illinois Form IL-W-4 and Form I-9. An employee who lives in Iowa, Kentucky, Michigan or Wisconsin files Form IL-W-5-NR to be exempt from Illinois withholding under the reciprocal agreements.
4. Withhold Illinois tax at 4.95% of the wages remaining after allowances, using the IL-700-T tables. As the withholding agent you are liable for tax you were required to withhold, even if you did not withhold it.
5. Deposit the tax. On a monthly schedule, pay by the 15th of each month for the prior month, electronically or with Form IL-501. On a semi-weekly schedule, pay electronically by Wednesday for amounts withheld Wednesday to Friday and by Friday for amounts withheld Saturday to Tuesday.
6. File Form IL-941 each quarter electronically, and file W-2s electronically. Use the correct year's form because the scanline is tied to the period and FEIN.
7. Report wages to IDES on Form UI-3/40 quarterly through MyTax Illinois. Employers with 25 or more employees also file monthly wage reports for the first two months of each quarter.
8. Pay UI contributions by EFT credit, MyTax Illinois or check with the coupon.
9. Report each new hire within 20 days of their first day on the payroll to the Illinois New Hire Directory online, by IDES form, or by magnetic filing. Include the employee's name, home address, SSN and hire date, and your name, address and FEIN.
10. Respond to claim notices through SIDES or on time by other means, to keep your UI rate down.

Illinois UI rates and wage base

IDES says rates include the Fund Builder and some industries have different new-employer rates, so use the notice IDES sends after registration.

Documents and information you need

• EIN letter and entity papers
• Employee forms: W-4, IL-W-4, I-9, IL-W-5-NR where applicable
• Hire dates, addresses and SSNs for the New Hire report
• Pay rates and schedules, and benefit deductions
• Prior-employer wage data for UI rate purposes, if you acquired a business

Deadlines and penalties

IDES assesses a penalty for late or missing UI-3/40 reports, and responsible officers can be personally liable for unpaid contributions, with liens and levies possible. IDOR can assess withholding tax against the employer even if it was not collected from the employee. See the Illinois compliance calendar.

Hiring workers from India and Canada

Illinois withholding follows federal income tax withholding, so wages that carry federal withholding carry Illinois withholding on the employee's Form IL-W-4. FICA is a separate question. An H-1B, L-1 or TN employee is subject to FICA; nonresident F-1 students on OPT are generally exempt from FICA but not from income tax withholding. See our Social Security and Medicare guide and hiring US employees from abroad. For a US-Canada secondment, confirm the certificate of coverage before payroll starts.

Country notes

Worked example: a new Aurora employer

An IT staffing firm hires its first employee, an H-1B engineer, on November 3, 2026. The firm registers before November 3, collects Forms W-4 and IL-W-4, and reports the hire by November 23. Assuming $5,900 of Illinois-taxable wages in a month after allowances, Illinois withholding is $292.05 (4.95%). The 2026 UI cost for this employee is capped at 3.350% of $14,250, or $477.38, if the standard rate applies. Federal FICA is withheld on the full salary because an H-1B employee is subject to it.

Mistakes to avoid

• Registering after the first payroll.
• Treating an independent contractor as outside the new-hire report. IDES says contractors are reported too.
• Paying monthly when your liability moved you to semi-weekly.
• Filing IL-941 on paper without an approved waiver.
• Reusing last year's IL-941 for a new period.

How we can help

Our Aurora, Illinois firm registers new employers with IDOR and IDES, runs payroll, files IL-941 and UI-3/40, and reports new hires. We coordinate with your Indian CA or Canadian CPA for cross-border secondments. See our payroll and employer compliance service and the US employer checklist.

Frequently asked questions

General information only. It is not tax, legal, accounting or immigration advice for your situation, and rules change; confirm the current rules with the official source or a licensed professional in the relevant country.