How to Run Payroll in Illinois: A Guide for Foreign Employers

Running payroll in Illinois means dealing with two separate state agencies at the same time: the Illinois Department of Revenue (IDOR) handles income tax withholding, and the Illinois Department of Employment Security (IDES) handles unemployment insurance, plus all your federal obligations. Neither agency will notify you about the other if you miss a registration.

This guide walks through the exact steps for Illinois payroll as a foreign employer: every registration requirement, tax rate, withholding rule, filing form, deadline, pay stub requirement, and fine, in the order you'll need them.

What this guide covers:

• How to set up payroll accounts in Illinois
• Employer and employee payroll tax rates and caps
• Illinois income tax withholding mechanics
• The full payroll filing cycle and quarterly/annual returns
• Pay stub requirements under Illinois law
• Penalties for late filing and misclassification

Illinois Payroll at a Glance

Understanding what these rates mean for your total staffing budget is its own calculation, and one that many foreign finance teams underestimate. The total cost of hiring in Illinois includes employer contributions, statutory benefits, and common market-rate add-ons in full.

How to Set Up Payroll in Illinois

Follow the sequence below whether you have a week until first payroll or three months. Don't reorder the steps, as each one creates a prerequisite for the next.

1. Establish your legal basis for employing in Illinois. A foreign company must either register a US entity (usually a Delaware LLC or corporation, then foreign-qualify in Illinois through the Illinois Secretary of State) or use an *employer of record (EOR)*, a licensed US entity that employs your workers on your behalf. Using an EOR in Illinois skips the entity registration step entirely and transfers payroll compliance to the EOR. Getting this wrong affects every filing that follows.
2. Obtain a federal Employer Identification Number (EIN). Your *EIN* is the nine-digit federal tax ID that identifies your payroll accounts with the IRS and all state agencies. Apply via IRS Form SS-4. International entities with no US principal officer must apply by fax or mail; US-resident responsible parties can apply online for an immediate EIN.
3. Register for Illinois income tax withholding with IDOR. Complete Form REG-1 through MyTax Illinois, the state's unified online tax portal, to open a withholding account. Once registered, IDOR assigns a deposit schedule and gives you access to file Form IL-941 quarterly.
4. Open an Illinois unemployment insurance account with IDES. Register at the IDES employer portal within 30 days of becoming a covered employer. New employers start at a rate of 3.35% in 2026. The taxable wage base increased to $14,250 in 2026. IDES will mail you your account number and initial rate notice.
5. Obtain workers' compensation coverage. Illinois requires coverage from your first hire, with no minimum employee count. Buy a policy from a state-licensed private carrier. Rates vary by NCCI *class code*, which reflects occupational risk. You must have proof of coverage available on demand.
6. Set the pay schedule to comply with Illinois's pay-frequency rules. Illinois employers must pay employees at least semi-monthly, and paydays must occur no later than 13 days after the end of the pay period. Salaried FLSA-exempt employees can be paid monthly if the full salary goes out on or before the 26th of the month.
7. Confirm local minimum wage obligations. Illinois doesn't permit cities or counties to levy a local income tax anywhere in the state. But minimum wage tiers do differ by geography: the statewide rate is $15.00 per hour, Chicago moves to $17.05 per hour effective July 1, 2026 (for employers with four or more workers), and Cook County outside Chicago reaches $15.40 per hour on the same date. More than 80% of Cook County municipalities have opted out, so what applies depends on the specific municipality where work happens.
8. Register new hires with IDES. Illinois accepts the federal new-hire report through the state agency, with the report due within 20 days of the hire date. Filing through the IDES new-hire portal satisfies both the state and federal requirement at once.
9. Establish the payment rail. Net pay must be in USD. Federal tax deposits go to the IRS via EFTPS (Electronic Federal Tax Payment System); Illinois withholding and UI payments go through MyTax Illinois. You'll need a US bank account, or a payroll provider with a US banking relationship, for both channels.

Employer and Employee Payroll Taxes in Illinois

Illinois keeps its state-level payroll tax structure deliberately lean: there's no state disability insurance, no paid family leave tax, and no employer training tax.

Employer Taxes and Contributions

The table below lists each scheme on its own, with calculation bases and caps verified for 2026. The prose that follows explains why the combined total varies.

FUTA applies at 6% of the first $7,000 of each employee's taxable wages, and you can claim a tax credit of up to 5.4% for the state unemployment tax you pay on time, bringing the net FUTA cost down to 0.6% for most Illinois employers.

The combined employer rate varies for three main reasons: UI experience rating (an employer with a heavy claims history can reach 7.05% on the Illinois wage base), workers' comp class codes (a software firm and a warehouse operator pay entirely different rates), and whether any Cook County or Chicago minimum wage uplift increases your payroll exposure itself.

Employee-Side Taxes and Withholdings

Your company withholds all of the following from each employee's gross pay each period and remits them. The employee doesn't handle these amounts directly.

For employees earning more than $200,000 per year, you withhold an Additional Medicare Tax of 0.9% on the amount over $200,000, though you don't pay that tax yourself.

Illinois has no employee-funded state disability or paid family leave contribution, which simplifies the employee-side calculation compared to states like California or New York. This is a useful contrast for foreign employers accustomed to employment contracts and pay documentation for international teams, as covered in the global payroll tax comparison.

What Makes Rates Vary in Illinois

For experience-rated employers (those with three or more years of claims history), the IDES contribution rate is based on a benefit ratio, set so that the greater the unemployment caused by the employer, the higher the rate. A new employer starts at 3.35% and moves up or down annually based on that ratio.

Workers' comp class codes (set by the National Council on Compensation Insurance) can push total employer cost well above the range listed above for physically demanding occupations. A Chicago-based logistics company, for example, carries a higher workers' comp rate and a higher minimum wage floor than a remote software team operating statewide, even though both face identical IDES and FICA obligations.

Effective management of global payroll requires tracking these variable rates per employee, not applying one blended rate to your whole headcount.

Income Tax Withholding in Illinois

How the Withholding System Works

Each employee provides a completed Form W-4 (federal) and a Form IL-W-4 (Illinois state). The IL-W-4 captures the employee's personal exemption allowances, which you use to reduce the employee's Illinois net income before applying the flat rate. You withhold the applicable rate from paychecks and remit it to the Illinois Department of Revenue on either a semi-weekly or monthly schedule based on total withholding volume.

If an employee provides no IL-W-4, you default to zero exemptions and withhold at the full 4.95% on all wages.

Federal deposit scheduling is determined by the IRS look-back period: employers whose total federal payroll tax liability in the look-back period (the second preceding 12-month period ending June 30) was $50,000 or less deposit monthly, while those above that threshold deposit semi-weekly. Illinois follows this same logic. High-volume withholders remit more often.

Illinois also has reciprocal agreements with Iowa, Kentucky, Michigan, and Wisconsin, so employees who live in those states and work in Illinois can be exempt from Illinois withholding if they file the proper exemption form.

Federal payroll records must be kept for four years from the date the tax is due or paid, whichever comes later. As of January 1, 2025, the IWPCA requires employers to keep pay stubs for at least three years from the pay date.

Illinois Income Tax Brackets

Illinois applies a single flat rate to all employee wages: no brackets, no phase-outs based on income level, and no local income tax anywhere in the state.

Illinois uses a flat income tax system with one rate of 4.95%, so the same rate applies regardless of filing status or income level. The personal exemption amount for tax year 2025 is $2,850, which employees claim via Form IL-W-4 to reduce the base for withholding. Federal brackets still apply normally on top of the state rate.

The simplicity of a single state rate is one reason running payroll across multiple countries is often more complex than running Illinois-only payroll. But the administrative burden of two separate Illinois agencies (IDOR and IDES) remains a recurring compliance risk for first-time operators.

The Payroll Filing Cycle in Illinois

Every pay period triggers actions. Every quarter triggers filings. Every year end triggers reconciliation. Here's the complete operational loop.

The Recurring Payroll Cycle

1. Calculate gross pay. Include base wages, overtime at a minimum of 1.5 times the regular rate for non-exempt hours over 40 in a workweek (FLSA, mirrored by Illinois law), bonuses, commissions, and taxable fringe benefits. Expense reimbursements that comply with an accountable plan are not wages and stay out of gross pay.
2. Calculate employer taxes per scheme. Apply 6.2% Social Security on wages up to $176,100, 1.45% Medicare on all wages, the applicable IDES UI rate on the first $14,250 of the year's wages, and FUTA at 6% on the first $7,000 (net 0.6% after SUTA credit). Workers' comp premiums are calculated by the carrier on a separate schedule.
3. Withhold employee-side taxes. Deduct 6.2% Social Security and 1.45% Medicare from gross pay, plus 0.9% Additional Medicare on any wages above $200,000.
4. Apply income tax withholding. Calculate federal income tax from the employee's Form W-4 using current IRS withholding tables (IRS Publication 15-T). Calculate Illinois withholding at 4.95% of net income after the IL-W-4 personal exemption allowance. Subtract both from gross pay to reach net pay.
5. Issue a compliant pay statement. Every pay period, give each employee an itemized pay stub (electronic or paper) that meets Illinois's legal requirements, detailed in the Pay Stub section below.
6. Pay the employee on schedule. Deliver net pay in USD no later than 13 days after the pay period closes. Final wages upon termination or resignation must go out by the next regularly scheduled payday.
7. Deposit federal taxes. Remit combined federal payroll taxes (income tax withheld, employee FICA, employer FICA) to the IRS via EFTPS on your assigned monthly or semi-weekly schedule. Remit Illinois withholding through MyTax Illinois on IDOR's assigned schedule.
8. File quarterly returns. File Form 941 with the IRS by the last day of the month following each quarter (April 30, July 31, October 31, January 31). File Form IL-941 (Illinois Withholding Income Tax Return) with IDOR on the same quarterly schedule via MyTax Illinois. File Form UI-3/40 (Quarterly Contribution and Wage Report) with IDES by the last day of the month following the quarter; employers with 25 or more employees in the prior calendar year must file electronically.
9. Reconcile annually. File Form 940 (FUTA) with the IRS by January 31 of the following year (or February 10 if all FUTA deposits were made on time). Give W-2s to employees and file W-2/W-3 with the SSA by January 31. File the Illinois annual withholding reconciliation (Form IL-W-3) with IDOR by January 31.

Late Filing and Payment Penalties

Missing Illinois payroll deadlines carries costs that compound faster than most foreign finance teams anticipate: federal and state fines run simultaneously.

Federal failure-to-deposit (FTD) penalties under IRC Section 6656 escalate in four tiers based on how many days late:

• 1-5 days late: 2% of the undeposited amount
• 6-15 days late: 5%
• 16 or more days late (or 10+ days after IRS notice): 10%
• Not paid within 10 days of an IRS demand notice: 15%

If Form 941 itself is filed late, the failure-to-file fine accrues at 5% per month of the unpaid tax shown on the return, capped at 25%. Under IRC Section 6672, responsible persons who willfully fail to collect, account for, or pay trust fund taxes (federal income tax withheld plus the employee FICA share) can face personal liability for 100% of the unpaid trust fund amount.

This *Trust Fund Recovery Penalty (TFRP)* reaches the individual who made the payroll decision, not just the entity.

Illinois state penalties for late withholding and UI payments include interest charges and penalties of up to 15% of the unpaid amount, enforced by IDOR and IDES respectively. Late wage payments under the Wage Payment and Collection Act can result in liability for the full amount owed, plus damages equal to 2% of the underpayment per month.

Misclassifying employees as contractors triggers back taxes, interest, and statutory penalties at both the federal and state level, with the IRS, IDES, and the Illinois Department of Labor all having independent audit authority. For foreign companies weighing how to structure their workforce before incurring those risks, the options for hiring without a registered entity in Illinois provide a legal framework that avoids direct-employer exposure.

The distinction between worker classifications also has implications for how global contractor compliance obligations apply across jurisdictions.

Pay Stub Requirements in Illinois

Pay stub compliance is a recurring source of liability for foreign employers. Illinois made it stricter in 2025.

Public Act 103-0953 amends the Illinois Wage Payment and Collection Act and gives workers greater sight into their earnings, deductions, and working hours. Effective January 1, 2025, the IWPCA defines a *pay stub* as a mandatory itemized statement that must include the following elements, verified against the amended statute:

• Hours worked: Required for all employees, hourly and salaried exempt alike
• Rate of pay: The applicable hourly or salary rate for the period
• Overtime hours worked and overtime pay: Itemized separately from regular pay
• Gross wages earned: Total before any deductions
• Wage deductions: Every withholding itemized individually
• Year-to-date totals: Cumulative wages and deductions for the tax year

You must give employees a pay stub electronically or in hardcopy each pay period. Electronic delivery is allowed without requiring separate employee permission, but if the employee loses access to your payroll portal after separation, you must offer the departing employee copies of pay stubs from the year preceding separation, and that offer must come by the end of the individual's final pay period.

You must keep copies of employees' pay stubs for at least three years after the date of payment, even if the employment relationship ends before that three-year mark runs. Employees must get copies of pay stubs within 21 days of a written request.

Non-compliance with the pay stub requirements under Public Act 103-0953 carries a civil fine of up to $500 per violation, on top of any damages under the IWPCA's existing wage non-compliance provisions. For foreign employers used to employment contracts and pay documentation for international teams, the Illinois itemization requirements are more detailed than most European equivalents.

Additional Payroll Obligations in Illinois

Expense Reimbursements and Allowances

Illinois is one of a handful of US states that legally requires business expense reimbursement. Section 9.5 of the IWPCA says an employer must reimburse an employee for all necessary expenditures or losses incurred by the employee within the employee's scope of employment and directly related to services performed for the employer. This isn't optional. It's a statutory obligation that the Illinois Department of Labor can enforce.

This applies regardless of whether employees are using personal devices (such as mobile phones, internet connections, or tablets) for work-related purposes. For remote workers, that means a proportionate share of home internet costs may be reimbursable if the work primarily benefits the employer. Employers who reimburse at or below the IRS standard mileage rate and through an accountable plan avoid income and payroll tax treatment on those amounts.

Reimbursements that exceed actual expense or are paid without business-purpose documentation lose their tax-free status and become wages subject to withholding.

Year-End Payroll Obligations

Year-end in Illinois involves several concurrent deadlines:

• W-2 delivery and filing: Employees receive W-2s, and the W-2/W-3 package files with the SSA, by January 31
• Form 940 (FUTA): Filed with the IRS by January 31, or February 10 if all FUTA deposits were made on time
• Form IL-W-3: Illinois annual withholding reconciliation filed with IDOR via MyTax Illinois by January 31
• ACA reporting (Form 1095-C): Required for *applicable large employers (ALEs)* (those with 50 or more full-time equivalent employees) filed with the IRS and delivered to employees by January 31

Pairing a review of global employee benefits obligations with these year-end filings helps foreign employers figure out which additional benefit-related tax reporting (HSA contributions, commuter benefits, group-term life) must flow through the W-2.

Local and Industry Variations

Illinois doesn't permit municipal income taxes, so there's no Chicago payroll income tax, no Cook County payroll income tax, and no local withholding account to maintain. The local variation that does matter operationally is the multi-tier minimum wage structure: statewide at $15.00, Chicago at $17.05 from July 1, 2026, and Cook County (where applicable municipalities haven't opted out) at $15.40 from the same date.

Chicago and Cook County adjust rates every July 1 by CPI, while the state rate hasn't moved since January 2025. Illinois employers in the Chicago metro face a mid-year payroll change each year that most US states don't require.

Prevailing wage obligations apply to public works contracts under the Illinois Prevailing Wage Act and are administered by the Illinois Department of Labor. Private-sector employers not engaged in public works construction aren't affected. The distinction between how EOR models versus traditional employment handle these local-rate updates is relevant for foreign employers deciding which operating structure minimizes ongoing compliance overhead.

How Borderless AI Runs Payroll in Illinois

Borderless AI operates as the registered employer through its own US entity, not as an aggregator, handling the complete Illinois payroll cycle so your team focuses on the work, not the filings.

The platform calculates gross-to-net pay with every federal and Illinois tax applied at the correct rate and cap, deposits federal taxes via EFTPS on the assigned schedule, remits Illinois withholding and UI contributions through MyTax Illinois and the IDES portal, and generates pay stubs that meet every requirement of the 2025 IWPCA amendments.

State law changes (minimum wage updates, new leave mandates, revised UI wage bases) apply automatically without manual intervention. For companies that have already registered their own Illinois entity and need payroll administration only, Global Payroll handles the full filing cycle under your entity.

For companies entering Illinois without a US legal entity, the Employer of Record service provides the complete employment infrastructure (entity, payroll, compliance, and HR) as a single engagement.

Book a demo to see how Borderless AI handles Illinois payroll end-to-end, from the first tax calculation to the last filing.

*This guide is for general informational purposes only and does not constitute legal, tax, or payroll advice. Payroll regulations in Illinois change frequently. Rates, thresholds, and filing requirements are updated at least annually. Verify all figures with the relevant authorities or a qualified payroll professional before processing payroll.*

More: Illinois Hiring Guides

This guide is part of our complete Illinois hiring series. See the other topics:

• How to Hire Employees in Illinois Without a Legal Entity
• How to Hire Employees in Illinois Using an Employer of Record
• Best Employer of Record Services in Illinois
• How Much Does It Cost to Hire an Employee in Illinois?