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Payroll Tax in Illinois: Complete Guide 2026

Tax information is for educational purposes only and does not constitute tax advice. Consult a licensed tax professional for your specific situation.

Illinois employers must manage two primary state-level payroll tax obligations: state income tax withholding and Unemployment Insurance (UI) contributions. Illinois levies a flat income tax of ~4.95% on all employee wages, making withholding calculations straightforward compared to states with graduated rates. The UI tax is employer-paid and experience-rated. Illinois does not impose state disability insurance or paid family leave programs, keeping the overall payroll tax structure relatively simple compared to states like California and New York.

Illinois Payroll Tax Rates (2026)

Employer-Paid Taxes

Tax	Rate	Wage Base
Unemployment Insurance (UI)	~0.550% — ~7.750%	First ~$13,590 per employee
New employer rate	~3.525%	First ~$13,590
Fund Building Rate surcharge	~0.55%	First ~$13,590

Employee-Paid Taxes

Tax	Rate	Wage Base
State income tax withholding	~4.95% flat	No cap

Combined Federal and State Overview

Tax	Rate	Paid By	Wage Base
Social Security (OASDI)	~6.20%	Employee + ~6.20% employer	~$176,100
Medicare	~1.45%	Employee + ~1.45% employer	No cap
Additional Medicare	~0.90%	Employee only	Over ~$200,000
Illinois income tax withholding	~4.95%	Employee	No cap
Illinois UI	~0.550% — ~7.750%	Employer	~$13,590

How Illinois Payroll Taxes Work

State Income Tax Withholding

Illinois uses a flat income tax rate of ~4.95% applied to all taxable compensation. This simplifies withholding calculations because the same rate applies regardless of the employee’s income level. Employers calculate withholding based on the employee’s Form IL-W-4 (Employee’s Illinois Withholding Allowance Certificate).

Key withholding rules:

The ~4.95% rate applies to gross wages after allowances
Each allowance reduces taxable wages by ~$2,775 annually
No standard deduction or graduated brackets — straight ~4.95% on the remaining amount
Supplemental wage withholding also uses the flat ~4.95% rate

Unemployment Insurance (UI)

Illinois UI is an employer-only tax applied to the first ~$13,590 of each employee’s annual wages. The rate is experience-rated based on the employer’s claims history.

Rate details:

New employers: Assigned ~3.525% for the first three years, plus a Fund Building Rate of ~0.55%.
Experienced employers: Rates range from ~0.550% to ~7.750% depending on the employer’s benefit charge ratio.
Fund Building Rate: An additional surcharge that varies annually based on the UI trust fund balance.

No Disability or Paid Family Leave

Unlike states such as California, New York, and New Jersey, Illinois does not impose state disability insurance or a mandatory paid family leave program. This reduces both the employer administrative burden and employee paycheck deductions.

Employer Registration and Compliance

Illinois employers must register with two agencies:

Illinois Department of Revenue (IDOR): For state income tax withholding. Employers receive an account number and are assigned a filing frequency (monthly, quarterly, or semi-weekly) based on withholding amounts.
Illinois Department of Employment Security (IDES): For UI contributions. Registration triggers an experience-rating account.

Key compliance requirements:

Withholding returns: File Form IL-941 (Illinois Quarterly Withholding Income Tax Return) each quarter.
UI returns: File Form UI-3/40 each quarter, reporting wages and UI contributions.
Payment schedule: Withholding deposits may be required semi-weekly, monthly, or quarterly based on the total amount withheld.
Annual filing: Form W-2 copies must be submitted to IDOR by January 31.
Record retention: Maintain payroll records for at least ~4 years.

Comparison to National Average

State	State Income Tax Withholding	UI Wage Base	Disability/PFL
Illinois	~4.95% flat	~$13,590	None
Indiana	~3.05% flat	~$9,500	None
Wisconsin	Up to ~7.65% graduated	~$14,000	None
Michigan	~4.25% flat	~$9,500	None
Missouri	Up to ~4.80% graduated	~$10,500	None
National average	Varies	~$16,500	Varies

Illinois’s flat rate simplifies withholding but is higher than neighboring Indiana and Michigan. The UI wage base of ~$13,590 is below the national average but higher than many neighboring states.

Tips for Managing Illinois Payroll Tax

Use the flat rate to simplify processing. The ~4.95% flat rate means no bracket calculations are needed, reducing payroll errors.
Monitor your UI experience rate. Contest unjustified unemployment claims with IDES to maintain a low rate.
Track the ~$13,590 UI wage base. Once an employee exceeds this threshold, no further UI contributions are owed for that employee.
File withholding deposits on time. Illinois imposes penalties of ~2% to ~15% on late deposits, with interest accruing daily.
Ensure correct IL-W-4 forms. The Illinois W-4 is different from the federal Form W-4. Verify that all employees have completed the correct state form.
Classify workers accurately. Illinois uses an ABC test for unemployment insurance purposes, which can differ from the federal common-law test.
Review the Fund Building Rate annually. This surcharge changes based on the UI trust fund balance and is communicated by IDES each year.

Key Takeaways

Illinois employers must withhold a flat ~4.95% state income tax from all employee wages.
The UI tax is employer-paid, ranging from ~0.550% to ~7.750% on the first ~$13,590 of wages.
New employers pay ~3.525% plus a Fund Building Rate of ~0.55%.
Illinois does not impose state disability insurance or paid family leave.
The flat income tax rate simplifies withholding compared to graduated-rate states.
Employers must register with both the IDOR (withholding) and IDES (unemployment).

Next Steps

Federal Income Tax Guide 2026 — Federal payroll taxes that apply alongside Illinois obligations.
Self-Employment Tax Guide — Illinois considerations for self-employed individuals.
State Income Tax Rates Comparison 2026 — See how Illinois compares to all 50 states.
Tax Bracket Calculator — Estimate combined federal and Illinois tax liability.
Find a CPA Near You — Get professional help with Illinois payroll compliance.