Payroll Taxes in Illinois: Everything You Need to Know

There’s nothing small about being a small business owner. The jobs and responsibilities of the employer are far-reaching, including keeping up on how to deal with payroll taxes correctly. If you’re in Illinois and have your own business, the following is a guide for doing payroll taxes.

Understanding Payroll Taxes in Illinois

Payroll taxes are part of operating a business in any state, including Illinois. There are a few different tax withholdings that you need to be aware of so that you’re taking out the proper amounts. You can use payroll accounting software to help you automatically deduct the proper amounts from your employees’ wages. A breakdown of the necessary payroll taxes in Illinois include:

  • Federal taxes.
  • FICA.
  • Social Security.
  • FUTA.
  • State taxes.

Let’s take a look at each of these in more detail.

Federal Taxes and How They Work

You must follow the federal tax guidelines for withholding each pay period for federal taxes. There are two options you can choose from to withhold for this tax: wage bracket or percentage. Each of these methods has an associated table listed in the IRS instructions that indicates how much to withhold. Keep in mind that whichever method you use, the federal tax will be between 0% and 37%.

FICA: What Is It?

FICA stands for the Federal Insurance Contributions Act. This act states that the employee and employer must both pay Social Security and Medicare taxes for the employee. The total FICA tax is 15.3%, half of which is paid by the employee and the other half by the employer. If an employee makes more than $200,000, special rules exist for Medicare withholding. This is detailed below.

Paying Social Security and Medicare Taxes

Social Security taxes are used to fund retirement, disability, and survivorship benefits. There are many Americans who receive funds from this account each year. The funds are distributed by the Social Security Administration.

The rate for the Social Security tax is 6.2% for the employer and 6.2% for the employee. The Social Security tax has a wage base limit of $160,200 for 2023, meaning that you aren’t required to pay the Social Security tax on any earnings above that amount.

The Medicare tax finances the U.S. Medicare health system, particularly Part A. It’s also a flat tax rate but is 1.45%. An additional Medicare tax of 0.9% is withheld if an employee filing single makes more than $200,000. This additional amount is paid by the employee and not the employer.

About FUTA

FUTA stands for Federal Unemployment Tax Act. This is the federal portion of the unemployment tax that raises revenue to pay for unemployment insurance in case of an employee’s job loss. You must pay this tax if either of the following two conditions are met:

  • The wages you pay total at least $1,500 in any quarter.
  • You employ at least one person on any given day for 20 weeks in a calendar year, regardless of whether the weeks are consecutive.

The FUTA tax is imposed on wages up to $7,000 for each employee, and the rate is 6.0%. You can claim credits totaling 5.4% on your gross FUTA tax as long as you pay your state’s unemployment taxes on time. This reduces the FUTA tax rate to 0.6%.

State Taxes for Employees in Illinois

There are taxes that must be paid to the state. In Illinois, it’s rather straightforward because the formula is the same for everyone. In other words, you don’t have to use tables to determine how much tax to withhold. Illinois imposes a flat rate tax of 4.95% on employee wages.

You also don’t need to worry about local, county, or municipal taxes because Illinois doesn’t require those to be withheld or paid. You’ll have to be sure to send in state taxes on an ongoing basis and not at the end of the year. To make your payment, you must fill out Form IL-941 and submit it quarterly. The due dates for filing are as follows:

  • Quarter 1: January, February, March. The quarter ends on Mar. 31. Payment must be made by May 1.
  • Quarter 2: April, May, June. The quarter ends on June 30. Payment must be made by July 31.
  • Quarter 3: July, August, September. The quarter ends on Sept. 30. Payment must be made by Oct. 31.
  • Quarter 4: October, November, December. The quarter ends on Dec. 31. Payment must be made by Jan. 31.

The state of Illinois also requires every business to register with the Illinois Department of Employment Security (“IDES”) and file unemployment insurance contributions. The rate in 2023 ranges from 0.550% to 8.1%.

What Is Employee Classification?

Before you get too overwhelmed thinking about the various taxes, it’s important that you understand the difference between an employee and an independent contractor is. While this may sound simple enough at first, it can be confusing for some new business owners.

You’ll need to classify your employees properly so you aren’t overpaying in taxes or withholding unnecessarily. The main classification question is whether the person is an employee or an independent contractor. You won’t withhold any taxes or pay unemployment taxes for independent contractors.

So, how do you know the difference between an employee and an independent contractor? An independent contractor will have these crucial characteristics:

  • They choose the method of how to complete a job, whereas you get to dictate only what the end result will look like.
  • They can work on their own schedule, including the hours and days they work. However, business owners can provide a deadline to complete a project (if it’s in the contract).
  • They don’t receive a steady paycheck from the company but rather obtain money when they complete a specific job or task.
  • You don’t provide them with the tools or supplies necessary to complete the job, and they can select whatever tools and supplies they want to complete the work.

If you misclassify a worker, it can affect the payroll taxes and what you owe or don’t owe. So, be sure to understand the classifications before moving forward.

Get Help With Payroll Taxes in Illinois

You can receive help completing your IL-941 forms by contacting Pasquesi Sheppard LLC in Lake Forest, Illinois. Our experienced accountants are qualified to provide payroll calculations and bookkeeping assistance. Get in touch with us today.

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