What payroll taxes do small businesses need to pay?

Payroll Taxes for Small Businesses in Illinois

Small businesses operating in Illinois must manage several payroll tax obligations to stay compliant and avoid penalties. Understanding these taxes helps streamline payroll processing and ensures accurate recordkeeping.

Federal Payroll Taxes

• Social Security Tax: Employers must withhold 6.2% of employee wages and match this amount.
• Medicare Tax: Employers withhold 1.45% and match the same percentage on employee wages.
• Federal Unemployment Tax Act (FUTA): Employers pay this tax separately; it is not withheld from employee wages. Rates may vary but generally apply to the first $7,000 of wages per employee annually.
• Federal Income Tax Withholding: Employers must withhold federal income tax based on employee W-4 forms and IRS tax tables.

Illinois State Payroll Taxes

• Illinois Income Tax Withholding: Employers withhold state income tax at a flat rate of 4.95% from employee wages.
• Illinois Unemployment Insurance (UI): Employers pay UI taxes based on their experience rate and taxable wage base. Rates vary by employer history and are subject to annual adjustments.
• State Disability Insurance: Illinois does not currently require a state disability insurance payroll tax.

Operational Considerations

• Timely Deposits: Deposit federal and state payroll taxes according to IRS and Illinois Department of Revenue schedules to avoid penalties.
• Accurate Reporting: File quarterly payroll tax returns such as IRS Form 941 and Illinois Form IL-941.
• Recordkeeping: Maintain detailed payroll records for at least four years, including wage calculations, tax withholdings, and tax filings.
• Automation: Use payroll software or services to automate tax calculations, withholdings, deposits, and filings to reduce errors and save time.
• Employee Classification: Properly classify workers as employees or independent contractors to ensure correct tax treatment.

As of 2026, stay updated with both federal and Illinois state agencies for any changes in payroll tax rates or reporting requirements.