If your small business has employees working in Illinois, you’ll need to withhold and pay Illinois income tax on their salaries. This is in addition to having to withhold federal income tax for those same employees. Here are the basic rules on Illinois state income tax withholding for employees.
With rare exceptions, if your small business has employees working in the United States, you’ll need a federal employer identification number (EIN). You should obtain your EIN as soon as possible and, in any case, before hiring your first employee. EINs are issued by the IRS and you’ll need one first and foremost for federal taxes. In addition, some states use the federal EIN for state withholding tax purposes. Other states (like Illinois) issue separate state tax ID numbers. In Illinois, you can’t get a permanent state tax ID until you have your EIN. You can apply for an EIN atthe IRS website. Generally, if you apply online, you will receive your EIN immediately.
Apart from your EIN, you also need to establish an Illinois withholding tax account with the Illinois Department of Revenue (IDOR). You can set up your account by registering your business with IDOR online, by mail, or in person at an IDOR regional office. To register online, use the Illinois Business Registration Application at MyTax Illinois (online registration confirmation generally is available in 1-2 days). To register by mail, complete and send in Form REG-1, Illinois Business Registration Application (registration confirmation generally is available in 6-8 weeks). After you register, your business will be issued a state tax account number. You will receive only a temporary tax account number if you don’t yet have an EIN. There is no fee to register your business with IDOR.
All new employees for your business must complete both a federal Form W-4 and the related Illinois Form IL-W-4,Employee’s Illinois Withholding Allowance Certificate. If an employee fails to sign the state form or include all necessary information or alters the form, the employer must withhold Illinois income tax on the entire amount of the employee’s compensation, without allowing any exemptions. You can download blank Forms IL-W-4 from the tax forms section of the IDOR website. You should keep the completed forms on file at your business and update them as necessary.
After you register your business, IDOR will assign you a schedule to make Illinois withholding tax payments and file Illinois withholding tax returns. In Illinois, there are three possible payment schedules: semi-weekly, monthly, or annually. New businesses are assigned to a monthly payment and quarterly return schedule. However, depending on how much tax your business is withholding, it later may be assigned to a different payment schedule.
Here are the due dates for the various payment schedules:
Any time a due date falls on a Saturday, Sunday, or state recognized holiday, the due date is extended to the next business day.
If you are making payments by mail, use Form IL-501, Payment Coupon. For annual payments, include the payment with your Form IL-941. IDOR may send you a booklet of coupons to use when making your periodic payments. Alternatively, depending on your specific situation, you may be required to make your payments electronically. For example, you must make payments electronically if you’re on a semi-weekly payment schedule. Make electronic payments using the MyTax Illinois website.
Payments should be the exact amounts withheld from an employee’s pay minus any credits. For current withholding tax rates and help calculating how much to withhold, check IDOR Publication 131, Withholding Income Tax Payment and Filing Requirements.
Apart from making scheduled tax payments, you must also periodically file withholding tax returns. The returns provide information to the state beyond just receiving payments. You can file online or use Form IL-941, Illinois Withholding Income Tax Return. The two possible schedules for filing returns are quarterly or annually. Returns are due quarterly for new businesses and most existing businesses. If IDOR moves your business to annual filings, you still will need to return to quarterly filings starting with any quarter where withholding exceeds a specified, low five-figure dollar amount The exact threshold dollar amount may change from one year to the next, so you should check with IDOR at least once a year for the latest information.
Form IL-941 is due by the last day of the month that follows the end of the quarter, as follows:
You can download blank return forms from the Withholding (Payroll) Tax Forms section of IDOR’s website. As with tax payments, any return due date that falls on a Saturday, Sunday, or state recognized holiday is adjusted to the next business day.
The federal government and many other states require employers to file an annual reconciliation after the end of the year. (For the federal government, this generally is IRS Form W-3 with Form W-2s attached.) The annual reconciliation, where required, is in addition to the requirement to provide each of your employees with a federal form W-2 summarizing the employee’s withholding for the year. Illinois, however, does not require you to file an annual reconciliation.
This article is only concerned with employees, not independent contractors. In general, different tax rules apply to independent contractors.
You may decide that it’s easiest to hand over responsibility for payroll, including withholding taxes, to an outside payroll service. If so, keep in mind that your business can still be held directly responsible for any mistakes made by an outside payroll company.
This article touches on only the most basic elements of Illinois employee withholding taxes. Under Illinois law, people associated with a business who control, supervise, or are responsible for filing returns and making payments for withholding tax, and willfully fail to file or pay, are held personally liable. Avoid possible penalties for making mistakes by checking both the IRS and IDOR websites for the latest information. You also can get more information about small business tax issues in other articles here on Nolo.com.