Payroll errors cost businesses an average of $845 per year in IRS penalties. Many of those penalties are completely avoidable with the right knowledge and systems in place. This guide covers everything Illinois employers need to know about federal and state payroll obligations.
Every employer in the United States is responsible for withholding, reporting, and depositing several federal payroll taxes. These are not optional - failure to comply results in some of the harshest penalties the IRS imposes.
| Tax | Employee Share | Employer Share | Details |
|---|---|---|---|
| Federal Income Tax | Varies (based on W-4) | None | Withheld from employee wages based on their W-4 form selections. Employer calculates and remits. |
| Social Security (OASDI) | 6.2% | 6.2% | Total 12.4%. Applies to wages up to the Social Security wage base of $168,600 (2025). No tax on wages above this threshold. |
| Medicare | 1.45% | 1.45% | Total 2.9%. No wage base limit - applies to all wages regardless of amount. |
| Additional Medicare | 0.9% | None | Applies only to employee wages exceeding $200,000 in a calendar year. Employee-only obligation. |
| FUTA (Federal Unemployment) | None | 6.0% (effectively 0.6%) | Applies to the first $7,000 of each employee's wages. Most employers receive a 5.4% credit for state unemployment taxes paid, reducing the effective rate to 0.6%. |
FICA (Federal Insurance Contributions Act) is the combined Social Security and Medicare tax. For most employees, the total FICA rate is 7.65% (6.2% + 1.45%), matched by the employer for a combined 15.3%. This is why self-employed individuals pay 15.3% in self-employment tax - they cover both sides.
In addition to federal obligations, Illinois employers have state-level payroll responsibilities. The good news: Illinois is simpler than many states because it has a flat income tax rate and no local income taxes.
| Tax | Rate | Details |
|---|---|---|
| Illinois State Income Tax | Flat 4.95% | Withheld from all employee wages. Illinois uses a flat rate, so the calculation is straightforward - no tax brackets to navigate. |
| Illinois Unemployment Insurance (SUTA) | New employer: 3.95% (2025) | Paid by the employer only. Rate becomes experience-rated after a qualifying period based on your claims history. Wage base: $13,590 per employee for 2025. |
| Local Income Tax | None | Illinois does not impose local or city income taxes - unlike states such as Ohio, Pennsylvania, or Indiana where local withholding can be required. |
| Workers' Compensation | Varies by industry | Required for all Illinois employers. This is insurance, not a tax - but it's mandatory. Rates depend on your industry classification code and claims history. |
Missing a payroll filing deadline triggers automatic penalties. Mark these dates on your calendar and set reminders at least one week in advance.
| Form | What It Is | Due Date(s) |
|---|---|---|
| Form 941 | Quarterly federal payroll tax return. Reports income tax withheld, Social Security, and Medicare taxes. | Jan 31, Apr 30, Jul 31, Oct 31 |
| Form 940 | Annual FUTA (federal unemployment tax) return. | January 31 (annually) |
| IL-941 | Illinois quarterly withholding tax return. Reports state income tax withheld from employee wages. | Same as federal: Jan 31, Apr 30, Jul 31, Oct 31 |
| W-2 Forms | Annual wage and tax statements for each employee. | Furnish to employees by Jan 31. File with SSA by Jan 31. |
| 1099-NEC Forms | Non-employee compensation for independent contractors paid $600+. | Furnish to contractors by Jan 31. File with IRS by Jan 31. |
The IRS requires you to deposit (not just file) payroll taxes on a specific schedule. Your deposit frequency is determined by the amount of taxes you reported in a "lookback period" - the 12-month period ending June 30 of the prior year.
If you reported $50,000 or less in payroll taxes during the lookback period, you're a monthly depositor. Deposit all payroll taxes accumulated during a calendar month by the 15th of the following month.
If you reported more than $50,000, you're a semi-weekly depositor:
Regardless of your deposit schedule, if you accumulate $100,000 or more in payroll tax liability on any single day, you must deposit the taxes by the next business day. This rule also automatically makes you a semi-weekly depositor for the remainder of the calendar year and the following year.
All federal payroll tax deposits must be made electronically through the Electronic Federal Tax Payment System (EFTPS) at eftps.gov. Set up your account well before your first deposit is due - enrollment can take 5-7 business days. Consider scheduling payments in advance to avoid last-minute issues.
Payroll penalties are among the most expensive and least forgiving the IRS imposes. Unlike some other tax penalties, payroll penalties can be assessed against business owners personally.
2% if 1-5 days late. 5% if 6-15 days late. 10% if 16+ days late. 15% if still unpaid 10+ days after first IRS notice. These penalties apply to the amount of the underpayment.
5% of unpaid tax per month, up to a maximum of 25%. If you file more than 60 days late, the minimum penalty is $510 or 100% of the unpaid tax (whichever is less).
If you misclassify employees as independent contractors, you owe 100% of the FICA taxes you should have withheld, plus the employer's share. Additional penalties and interest apply.
The IRS can hold "responsible persons" personally liable for unpaid withholding taxes. This means your personal assets - house, bank accounts, wages - are at risk. This penalty equals 100% of the unpaid trust fund taxes.
The Trust Fund Recovery Penalty (TFRP) is one of the most serious IRS penalties in existence. The IRS can pierce the corporate veil and go after your personal assets for unpaid payroll taxes. "Trust fund taxes" include the income tax and FICA taxes you withheld from employee paychecks - money that was never yours to spend. Never "borrow" from payroll tax funds to cover other business expenses. The IRS treats this as theft from employees and the government, and they pursue it aggressively. Anyone who has authority over the company's financial decisions can be held personally liable - including owners, officers, and even bookkeepers in some cases.
Worker misclassification is one of the IRS's top enforcement priorities. Getting this wrong exposes you to back taxes, penalties, and potential audits. The IRS examines three categories when determining a worker's status:
The IRS looks at three factors: behavioral control (do you direct how they do their work?), financial control (do you control their business expenses, provide tools, or determine pay structure?), and type of relationship (is there a contract, benefits, or permanence?). No single factor is decisive - it's the overall picture that matters.
If you're unsure whether a worker should be classified as an employee or contractor, file Form SS-8 with the IRS for an official determination. It's better to ask upfront than to be hit with years of back taxes and penalties. You can also consult with a CPA who understands employment tax law.
Illinois law requires employers to report all newly hired and re-hired employees to the Illinois Department of Employment Security (IDES) within 20 days of their start date. This applies to:
The required information includes the employee's name, address, Social Security number, date of hire, and your employer identification number (EIN). You can report online through the IDES website, by fax, or by mail.
New hire reporting is used to enforce child support orders and detect unemployment insurance fraud. Failure to report can result in fines of $15 per late report, increasing to $500 if the failure is the result of a conspiracy between the employer and employee.
Payroll compliance is complex but critical. Our team handles everything - from calculating paychecks to filing quarterly and annual tax returns - so you never have to worry about missed deadlines or penalties. We stay current on federal and Illinois state requirements, and we proactively alert you to changes that affect your business.
Whether you have 2 employees or 200, we scale our payroll services to fit your needs and budget. Schedule a free consultation to discuss what makes the most sense for your business.
Our team handles paychecks, tax filings, and compliance so you can focus on running your business. Schedule a free consultation to learn more.
