If your small business has employees working in Illinois, you'll need to pay Illinois unemployment insurance (UI) tax. The UI tax funds unemployment compensation programs for eligible employees. In Illinois, state UI tax is just one of several taxes that employers must pay.
Different states have different rules and rates for UI taxes. Here are the basic rules for Illinois's UI tax.
As an Illinois employer subject to UI tax, your small business must establish an Illinois UI tax account with the Illinois Department of Employment Security (IDES). You must register for a UI tax account within 30 days of starting a business as an employer.
You can register for an account with IDES either online or on paper. Once registered, you'll be issued a UI account number. To register online, use the MyTax Illinois website. To register on paper, use Form UI-1, Report to Determine Liability Under the Unemployment Insurance Act. Blank forms are available for download from the Employer Tax Information section of the IDES website. You don't have to pay a fee to register your business with IDES.
In Illinois, most for-profit employers are liable for state UI taxes as soon as they have either:
These are effectively the same rules that apply for liability under the Federal Unemployment Tax Act (FUTA). Different rules, not covered here, apply to agricultural (farm) workers, domestic (in-home) workers, and employees of some (but not all) non-profit organizations.
Once your business becomes liable for Illinois UI tax, it remains liable until IDES approves a termination request.
State UI tax payments generally can be credited against your FUTA taxes.
UI tax is paid on each employee's wages up to a maximum annual amount. That amount, known as the "taxable wage base," increases slightly every few years in Illinois. In recent years, and as of 2023, it has been around $13,000.
The state UI tax rate for new employers, also known as the "standard beginning tax rate," also can change from one year to the next. In recent years, it has generally been between 3.5% and 4.0%.
Established employers are subject to a lower or higher rate than new employers depending on an "experience rating." This means, among other things, whether your business has ever had any employees who made claims for state unemployment benefits.
In Illinois, UI tax reports and payments are due a month after the close of each calendar quarter. In other words, reports and payments are due by the following dates:
Any time a due date falls on a Saturday, Sunday, or state-recognized holiday, the due date is extended to the next business day.
You can file your reports and payments online or on paper. To file and pay online, you can use the MyTax Illinois system. IDES prefers that employers file and pay online. To file on paper, use Form UI-3/40, Employer's Contribution and Wage Report.
You must file quarterly returns even if no contributions are due. You will be subject to a penalty if you fail to file.
You must post a notice (poster) regarding state unemployment claims in a conspicuous place for all employees. The poster provides basic information on how to file an unemployment claim and what kinds of benefits are available.
You can download a notice (Stock Number 4427/ BEN-57) from the Forms and Publications section of the IDES website that meets all legal requirements.
Employers who use independent contractors rather than hiring employees aren't subject to the UI tax. However, it's important that you don't misclassify an employee as an independent contractor. If you misclassify an employee, you could be penalized or fined.
You may decide that it's easiest to hand over responsibility for payroll, including UI taxes, to an outside payroll service. If so, keep in mind that your business, or even you personally, may still be held directly responsible for mistakes an outside payroll company makes.
This article touches on only the most basic elements of Illinois UI taxes. Avoid possible penalties for making mistakes by checking both the IRS and IDES websites for the latest information.
IDES also has a helpful publication, Illinois Unemployment Insurance Law Handbook, that you can download from the IDES website.
In addition to state UI tax, employers have other responsibilities not covered in this article, such as federal UI tax, state and federal withholding taxes, and required reporting of new hires. Talk to a tax lawyer or employment attorney to learn more.