Operational Gaze:
How to Run Payroll in Illinois?

July 29th 2024

Managing payroll in Illinois involves the processes and legal procedures of compensating employees. These processes include calculating earnings, deductions, and complying with local payroll tax regulations. Understanding Illinois’s unique labor laws and tax regulations is crucial for efficient payroll management.

In this article, you’ll find a detailed, step-by-step guide tailored to Illinois’s payroll requirements to assist businesses in navigating each pay cycle accurately. Payroll management goes beyond issuing paychecks; it’s about taking care of your workforce and adhering to regulations, which is crucial for businesses. The guide aims to simplify the payroll process by offering insights and instructions for businesses in Illinois, ensuring smooth and compliant payroll operations, regardless of their level of experience.

This Article Covers

Laws That Affect Payroll Procedures in Illinois
Worker Classifications in Illinois
Payroll Forms and Relevant Bodies in Illinois
Applicable Taxes in Illinois
Key Pay Elements That Impact Payroll in Illinois
Step-by-Step Guide to Payroll in Illinois

Laws That Affect Payroll Procedures in Illinois

In the space of payroll procedures, certain legal regulations govern how employees are compensated and businesses must adhere to these rules. 

Illinois Laws

  • Illinois Labor Code: The Labor and Employment laws under the Illinois Administrative Code address various aspects of employment, including wage payments, sick leave, and workers’ compensation. It sets the standards for payroll-related matters in the state.
  • Minimum Wage Regulations: Employers in Illinois must adhere to the state’s minimum wage rates. The minimum wage in Illinois is $14.00 per hour.
  • Overtime Laws: Overtime pay in Illinois is determined based on daily and weekly hours worked. Employees are generally entitled to receive overtime pay at one and a half times their regular hourly wage for hours worked beyond 40 in a workweek.
  • Paid Breaks and Lunch Periods: While state and federal laws do not mandate specific breaks, employees in Illinois are generally entitled to a 20-minute meal break when working at least 7.5 hours.
  • Unemployment, Disability, and Workers’ Compensation: Employers in Illinois are required to participate in the state’s unemployment fund. Workers’ compensation insurance is also mandated by the state. Understanding and complying with these programs is crucial for employers.
  • Payment Records: Employers in Illinois must provide pay stubs to their employees. These pay stubs should include information such as the employer’s name, address, all deductions, and other legally required information.
  • Final Paycheck Regulations: When an employee leaves their job, they are entitled to receive their final paycheck promptly. This paycheck should include all wages earned, including any accrued vacation pay.

Federal Laws

  • The Fair Labor Standards Act (FLSA): The FLSA sets standards for minimum wage, overtime compensation, recordkeeping, and classification of exemptions. It applies to a wide range of businesses, including federal, state, and local government entities.
  • The Federal Insurance Contributions Act (FICA): FICA requires both employers and employees to contribute to Social Security and Medicare. Employers must withhold 6.2% of Social Security tax and 1.45% of Medicare tax from each employee’s earnings and match these deductions.
  • The Federal Unemployment Tax Act (FUTA): FUTA mandates that employers must make contributions to unemployment taxes, which provide benefits to eligible employees who experience job loss.

HR Laws

  • New Hire Reporting: Employers are required to report new hires to the appropriate state authorities within a specific timeframe, including details such as full names, addresses, social security numbers, and dates of employment.
  • Posting Requirements: Employers in Illinois must display labor law posters within the workplace, covering topics like minimum wage regulations and other essential labor laws.

Worker Classifications in Illinois

Accurately classifying workers as employees or independent contractors is vital. This classification has implications for payroll tax obligations and employee entitlements.

Employees and Independent Contractors

In Illinois, misclassification occurs when an employer designates an employee as an “independent contractor” instead of an employee. Some employers can accidentally misclassify in the workplace, in certain instances, it is done intentionally as an effort to evade legal obligations. Comprehending and accurately applying worker classifications holds significant importance for both employers and employees in the state of Illinois. This categorization has a significant impact on the management of payroll and exerts influence over the entitlements, advantages, and legal safeguards extended to employees.

In Illinois, when an individual is classified as an employee, their earnings are subject to state unemployment taxes, potentially rendering them eligible for unemployment benefits. Conversely, if they are classified as an independent contractor, the employer is relieved of the obligation to remit state unemployment taxes based on their income.

The ABC Test in Illinois

Illinois used the ABC test to determine worker classification. To accurately determine if a worker can be categorized as an independent contractor under the ABC test, all three of these criteria must be satisfied:

  • The individual operates without control or direction.
  • The tasks performed fall outside the usual scope of the employer’s business.
  • The individual typically conducts an independently established profession or business that aligns with the nature of the work carried out.

To learn more about the rights of salaried and hourly employees, you can read our guides on your rights as a salaried employee in Illinois, and your rights as an hourly employee in Illinois.

Payroll Forms and Relevant Bodies in Illinois

To ensure smooth payroll operations in Illinois, employers need to familiarize themselves with critical forms and relevant authorities. These include forms for state income tax withholding, Social Security and Medicare contributions, and workers’ compensation.

Illinois Payroll Forms

  • Form IL-941: Used to report and remit state income tax withheld from employees’ paychecks.
  • Form IL-501: This form is used to submit payments for state income tax withholding when filing Form IL-941.
  • Form IL-W-5-NR: The purpose of this form is to declare non-resident status for employees working in Illinois to exempt them from state income tax withholding.

Federal Payroll Forms

  • W-4 Form: This form is for employers to determine the correct tax withholding for their employees.
  • W-2 Form: This form is for displaying the total yearly earnings of each employee.
  • W-3 Form: This form summarizes the combined pay and taxes for all employees.
  • Form 940: This form is used for reporting and paying federal unemployment tax.
  • Form 941: Reports income and FICA taxes withheld from paychecks quarterly.
  • Form 944: Reports annual income and FICA taxes withheld from paychecks.
  • 1099 Forms: Provide contractors with the necessary information to calculate the taxes they owe the IRS based on their earnings.
  • Form I-9: Utilized to verify the identity and work eligibility of individuals employed in the United States.

Federal and Illinois Payroll/ Tax Bodies

  • Internal Revenue Service (IRS): The IRS serves as the principal federal tax agency responsible for collecting federal income taxes, including payroll taxes. Employers deduct federal income tax, Social Security, and Medicare taxes from employees’ earnings and forward these to the IRS.
  • Social Security Administration (SSA): The SSA administers the Social Security program, which encompasses Social Security benefits and Medicare. Employers and employees contribute to the Social Security and Medicare trust funds through payroll taxes. The SSA manages the collection and distribution of these funds to eligible individuals.
  • Department of Labor (DOL): The DOL enforces federal labor laws. This includes laws governing minimum wage, overtime, and workplace standards. It establishes the guidelines for the Fair Labor Standards Act (FLSA), along with other labor-related issues.
  • Illinois Department of Revenue: The Illinois Department of Revenue oversees state-level tax matters within Illinois, such as state income tax and sales tax. Employers in Illinois are obligated to comply with state tax regulations and report state income taxes withheld from their employees’ salaries.
  • Illinois Department of Labor: This department manages labor-related affairs in Illinois, encompassing unemployment compensation, wage and hour laws, and workplace safety. Employers in Illinois may need to adhere to state labor laws and report information concerning unemployment taxes to this department.
  • Illinois Department of Employment Security (IDES): IDES is responsible for administering unemployment insurance programs in Illinois. Employers are mandated to contribute to the state’s unemployment fund to provide benefits to eligible employees who face job loss.
  • Illinois Workers’ Compensation Commission: This commission oversees workers’ compensation programs in Illinois, including the compensation and benefits provided to workers who sustain job-related injuries or illnesses.
  • Illinois Secretary of State: The Illinois Secretary of State’s office plays a role in business registration and corporate entity matters, which includes the registration of corporations, limited liability companies (LLCs), and partnerships.

Applicable Taxes in Illinois

Employer Contributions

Federal Unemployment Tax Act (FUTA): Illinois employers must adhere to state and federal tax regulations. The state follows the Federal Unemployment Tax Act (FUTA) and sets a standard federal rate on the first $7,000 of each employee’s wages.

Withheld from Employee’s Wages

  • Illinois Income Taxes: In Illinois, individual income tax is at a flat rate of 4.75 percent. Furthermore, certain Illinois municipalities may impose local income taxes on both residents and non-residents, with tax rates differing from one city to another.
  • Workers’ Compensation in Illinois: Employers in Illinois are mandated to provide workers’ compensation insurance, regardless of the number of hours worked by their employees.
  • Social Security (FICA) Withholding in Illinois: Social Security withholding in Illinois adheres to federal regulations. It entails a 6.2% deduction on income up to a maximum taxable limit, which is $142,800 as of the provided information. Medicare withholding, particularly for the Hospital Insurance portion, amounts to an additional 1.45% of all income.

Additional Relevant Subtractions to Withhold on Behalf of Employees

The federal Fair Labor Standards Act (FLSA) allows employers to deduct money from employees’ paychecks only under specific circumstances as permitted by law or with the employees’ consent. Additionally, here are some examples of deductions that are legally acceptable:

  • Personal Absence: Employers can deduct money from an employee’s pay when they are absent for personal reasons for one or more full days, except in cases of sickness or disability.
  • Sickness or Disability: If employees are absent due to sickness or disability for one or more full days, deductions are permissible, but only if there is a valid plan or policy in place to compensate for lost pay due to illness.
  • Jury and Witness Fees: Deductions can be made to cover jury fees, witness fees, or temporary military duty pay received by employees.
  • Safety Violations: Employers can impose penalties in good faith for serious violations of safety rules, and these penalties may be deducted from employees’ pay.
  • Disciplinary Suspensions: Deductions are allowed for unpaid suspensions lasting one or more full days, serving as a disciplinary measure for violations of workplace rules, as long as they are imposed in good faith.
  • Family and Medical Leave: Employers can deduct money for unpaid leave taken under the Federal Family and Medical Leave Act, which offers job-protected leave for specific family and medical reasons.

Key Pay Elements That Impact Payroll in Illinois

Minimum Wage

The current minimum wage in Illinois is set at $14.00 per hour. Employers must comply with minimum wage laws to avoid breaking wage laws. Employers must also stay informed on wage laws, as the minimum wage requirements may change.

Overtime

Illinois follows the federal Fair Labor Standards Act (FLSA) and abides by its overtime regulations. If an employee works more than 40 hours in a week, they must receive overtime pay at 1.5 times their regular hourly wage. Given the current minimum wage of $14.00 per hour, this results in an overtime rate of $21.00.

Workers’ Compensation Insurance

In Illinois, employers are mandated to provide workers’ compensation insurance for employees who experience job-related injuries or illnesses. The cost of this insurance is typically factored into an employer’s overall payroll expenses.

Pay Stub Laws

Illinois follows federal law regarding wage payment methods and pay frequency, requiring employers to maintain accurate records of hours worked and wages paid. Employers may choose to issue pay stubs as a matter of company policy or to comply with state-specific requirements.

Paycheck Deduction

Illinois law permits specific paycheck deductions, including those related to personal absence, sickness or disability, jury and witness fees, safety violations, disciplinary suspensions, and family and medical leave. These deductions serve various purposes, from reinforcing safety compliance to accommodating family and medical needs.

Final Paycheck

When an employee leaves their job in Illinois, their final paycheck should be provided on the next scheduled payday, whether an employee quits or is terminated. This last paycheck should encompass the employee’s regular earnings from the most recent pay period, in addition to any other forms of compensation eligible for payout.

Step-by-Step Guide to Payroll in Illinois

  • Understanding Payroll Rules: Before diving into payroll in Illinois, it’s essential to grasp the specific rules that pertain to your business. These rules can vary based on factors like your industry, the number of employees, and worker types. Familiarize yourself with Illinois labor laws and federal payroll regulations affecting your operations.
  • Registering with the IRS: To begin, obtain your Employer Identification Number (EIN) and set up an account within the Electronic Federal Tax Payment System (EFTPS). New businesses should secure an EIN before creating a systematic payroll process. The EIN serves as a unique identifier used by the Internal Revenue Service (IRS) to track a company’s tax-related operations. You can apply for an EIN online using Form SS-4.
  • Registering with the State of Illinois: New businesses in Illinois can complete the registration process through the Illinois Secretary of State’s website. Additionally, any business paying employees in Illinois must also register with the Illinois Department of Revenue.
  • Determining Employee Classification: Accurate employee classification is vital because it affects tax and wage reporting. Misclassification can lead to legal issues and penalties. Consider using the Common Law Test for guidance.
  • Collecting Employee Payroll Forms: During the onboarding process, ensure employees complete the necessary forms, including the Illinois withholding tax form and I-9 Forms for employment eligibility verification.
  • Tracking Time and Attendance: Implement a reliable system for tracking employee hours, breaks, and attendance.
  • Establishing a Payroll Cycle: Set up consistent pay periods and ensure employees are paid on time.
  • Filing Taxes: Adhere to Illinois and federal tax guidelines, including withholding and reporting requirements.
  • Maintain Payroll Records: Keep accurate records of employee hours, wages, and deductions.
  • Annual Reporting: Complete annual reports, including W-2 forms and 1099 forms, and provide them to employees by the required deadlines.

Final Thoughts

Managing payroll in Illinois requires a lot of legal knowledge and compliance with laws. Employees must ensure they adhere to Illinois’s payroll regulations. To make the process of managing payroll easier, consider exploring our list of the top 6 applications tailored to streamline payroll responsibilities in the United States. If you’ve already established a payroll system, we’ve provided ten tips to enhance your payroll procedure within the United States.

Important Cautionary Note

This content is provided for informational purposes only. While we make every effort to ensure the accuracy of the information presented, we cannot guarantee that it is free of errors or omissions. Users are advised to independently verify any critical information and should not solely rely on the content provided.