Pub-130, Withholding Illinois Income Tax for My Employees

1. When must I withhold Illinois Income Tax from my employee’s compensation?
2. When is compensation paid in Illinois?
3. When am I not required to withhold Illinois Income Tax?
4. Am I required to withhold income tax for another state if my employee is not an Illinois resident?
5. What forms must my employee complete?
6. Do I owe other Illinois employment taxes?
7. What forms must I give my employee?
8. What forms must I submit to the Illinois Department of Revenue?
9. How do I complete Form W-2 for my employee showing income and withholding for Illinois?
10. How do I complete Form W-2G or Form 1099 for my payee showing withholding for Illinois?

You must withhold Illinois Income Tax when you withhold federal income tax from compensation you paid in Illinois. Compensation is paid in Illinois when the employee’s services are “localized” in Illinois. This statement applies to all individuals except qualifying residents of Iowa, Kentucky, Michigan, and Wisconsin, and military spouses. For further information, see “When am I not required to withhold Illinois Income Tax?”

The following are general rules for when compensation is paid in Illinois.

• If the employee’s service is localized in Illinois because all of the service is performed in Illinois, then compensation is considered paid in Illinois and subject to Illinois income tax withholding.
• If some of the employee’s services are performed outside Illinois, but the services outside Illinois are incidental to the services performed inside Illinois, then compensation is considered paid in Illinois and subject to Illinois income tax withholding.
  The term “incidental” means any service which is necessary to or supportive of the primary service performed by the employee or which is temporary or transitory in nature or consists of isolated transactions. The incidental service may or may not be similar to the individual’s normal occupation so long as it is performed within the same employer-employee relationship. That is, an individual who normally performs all of his service in Illinois may be sent by his employer to another state to perform service which is totally different in nature from his usual work or he may be sent to do similar work. So long as the service is temporary or consists merely of isolated transactions, it will be considered to be incidental. In every case, the ultimate determination to be made is
  • whether the individual’s service was intended to be and was in fact principally performed within Illinois and
  • whether any service which was performed in another state was of a temporary or transitory nature or arose out of special circumstances at infrequent intervals.

The amount of time spent or the amount of service performed outside Illinois, in itself, should not be regarded as decisive in determining whether such service is incidental to service performed within Illinois.

• If the employee is an Illinois resident and
  • neither of the rules above apply and
  • no other state’s taxes are withheld,

then compensation is considered paid in Illinois and is subject to Illinois income tax withholding.

• If the employee’s compensation is
  • not localized to any state under any of the rules above and
  • the employee performs significant service within Illinois for more than 30 working days, and
  • the service performed within Illinois is nonincidental to the employee’s service performed outside Illinois,

then a portion of compensation is considered paid in Illinois and subject to Illinois income tax withholding. The portion of compensation subject to Illinois withholding equals the total compensation paid to the employee multiplied by a fraction equal to the number of working days the employee spent within Illinois during the year divided by the total working days of the year.

“Working day” means all days during the tax year in which the individual performs duties on behalf of his or her employer. Days in which the individual performs no duties on behalf of his or her employer (e.g. weekends, vacation days, sick days, and holidays) are not working days.

A working day is spent within Illinois if:

the individual performs service on behalf of the employer and a greater amount of time on that day is spent by the individual performing duties on behalf of the employer within Illinois, without regard to time spent traveling, than is spent performing duties on behalf of the employer outside of Illinois; or

the only service the individual performs on behalf of the employer on that day is traveling to a destination within Illinois, and the individual arrives on that day.

Example: Mary is an Missouri resident who earned $60,000 in wages from her employer for the tax year. During the year, she performed services for her employer for 35 days in Illinois out of 250 total working days for the year. Accordingly, 14 percent (35 working days divided by 250) of Mary’s wages, or $8,400, was paid in Illinois and is subject to Illinois income tax withholding.

Working days spent within Illinois do not include any day in which the employee is performing services in Illinois during a disaster period solely in response to a request made to his or her employer by the government of Illinois, by any political subdivision of Illinois, or by a person conducting business in Illinois to perform disaster or emergency-related services in Illinois.

“Declared State disaster or emergency” means a disaster or emergency event

for which a Governor’s proclamation of a state of emergency has been issued; or

for which a Presidential declaration of a federal major disaster or emergency has been issued.

“Disaster period” means a period that begins 10 days prior to the date of the Governor’s proclamation or the President’s declaration (whichever is earlier) and extends for a period of 60 calendar days after the end of the declared disaster or emergency period.

“Disaster or emergency-related services” means repairing, renovating, installing, building, or rendering services or conducting other business activities that relate to infrastructure that has been damaged, impaired, or destroyed by the declared State disaster or emergency.

“Infrastructure” means property and equipment owned or used by a public utility, communications network, broadband and internet service provider, cable and video service provider, electric or gas distribution system, or water pipeline that provides service to more than one customer or person, including related support facilities. “Infrastructure” includes, but is not limited to, real and personal property such as buildings, offices, power lines, cable lines, poles, communications lines, pipes, structures, and equipment

• For compensation for services performed by a nonresident as a member of a professional athletic team, the amount that is paid in Illinois is the total compensation for services performed for the team during the year, multiplied by a fraction equal to the number of duty days spent within Illinois by the total number of duty days spent performing services for the team. See Section 304(a)(2)(B)(iv) of the Illinois Income Tax Act (IITA) for more guidance.

Limited exceptions to the above rules:

There are three limited exceptions when you are not required to withhold Illinois Income Tax. These exceptions are described as follows.

1. The employee works for an employer under the jurisdiction of the Surface Transportation Board (STB) and performs regularly assigned duties in more than one state. Do not withhold Illinois Income Tax unless the employee is an Illinois resident.
2. The employee works on an aircraft for an air carrier and performs regularly assigned duties in more than one state. Do not withhold Illinois Income Tax unless the employee is an Illinois resident, or, if the employee is not an Illinois resident, the employee earns more than 50 percent of the compensation in Illinois (Illinois flight miles versus all flight miles). Illinois flight miles do not include miles flown over Illinois without taking off or landing.
3. The employee works on a vessel and performs regularly assigned duties in more than one state. Do not withhold Illinois Income Tax unless the employee is an Illinois resident.

Examples of compensation paid in Illinois:

1. Your company employs an Indiana resident to make sales for your company. You control your employee’s services, all of which are performed in Illinois. Compensation is paid in Illinois because all of your employee’s services are performed in Illinois.
2. Your airline company employs a Missouri resident to fly to various destinations in the United States. Your employee reports to and flies out of a terminal in Illinois. According to your records, 58 percent of your employee’s compensation (flight time in Illinois versus flight time to other destinations) is earned in Illinois. Therefore, you must withhold Illinois Income Tax on compensation paid in Illinois to this employee because more than 50 percent of your employee’s compensation was earned in Illinois. Illinois flight miles do not include miles flown over Illinois without taking off or landing.

Unless you enter into a voluntary withholding income tax agreement, you are not required to withhold Illinois Income Tax from the following:

• compensation paid to residents of Iowa, Kentucky, Michigan, and Wisconsin (due to reciprocal agreements with each of these states);
• compensation paid to a non-military employee whose spouse is in the military, both of whom are residents of the same state (other than Illinois), and are only in this state because the spouse is stationed here by the military or where the non-military spouse does not live in the same state as the servicemember but elects to use their servicemember spouse’s state of residence for tax purposes as allowed by the Veterans Benefits and Transition Act of 2018;
• compensation paid to a non-resident employee who has performed less than 31 days of service in Illinois and whose compensation is not localized in Illinois under paragraphs one and two in the section “When is compensation paid in Illinois?”
• compensation paid to a non-resident employee whose service is performed entirely in another state;
• compensation paid to an Illinois resident whose service is performed entirely in another state, and the compensation is subject to withholding in another state;
• qualifying payments made for personal service contracts or prizes awarded from contests conducted in Illinois (Sections 1405.2 and 1405.3 of the IITA);
• compensation that will not be included in the recipient’s base income (e.g., annuity payments received from qualified employee benefit plans);
• payments subject to withholding under IRC, Sections 3405 or 3406;
• compensation paid by an employer under the jurisdiction of the Surface Transportation Board (STB), rail and motor carriers, to a nonresident employee who performs regularly assigned duties in more than one state;
• nonresident employees who work on aircraft for an air carrier, perform regularly assigned duties in more than one state, and do not earn more than 50 percent of the compensation in Illinois (Illinois flight miles versus all flight miles). Illinois flight miles do not include miles flown over Illinois without taking off or landing;
• compensation paid to a master or seaman on a vessel in the foreign, coastwise, intercoastal, interstate, or noncontiguous trade, or an individual employed on a fishing vessel or any fish processing vessel;
• compensation paid to an employee whose compensation is exempt from federal withholding requirements (e.g., “wages” paid to certain types of ministers); or
• compensation paid to household employees as defined by the IRS. (For more information, visit www.irs.gov and refer to IRS Publication 926.) Note: Pursuant to a voluntary federal agreement, if you withhold federal income tax from your household employees, Illinois withholding is required. Also, you may enter a voluntary Illinois withholding agreement. If you do withhold Illinois income tax, you may report and pay these taxes annually on Form IL-1040, Illinois Individual Income Tax Return, Line 20 (No registration is required), or you may file Form IL-941 quarterly (requires registration as a withholding agent). For more detailed information, see Publication 121, Illinois Income Tax Withholding for Household Employees.

Examples for when withholding is not required.

1. Your company, headquartered in Missouri, hires an Illinois resident to install computer networks for your Missouri based clients. Your employee travels to your clients’ branch offices in Illinois to complete network installation for a total of 20 working days. Compensation is not paid in Illinois because your company headquarters/base of operations is in Missouri and your employee performed services in Illinois for less than 31 working days. Therefore, you do not withhold Illinois Income Tax. (See the note below.)
2. Your company’s main office is in Indiana. You employ an Illinois resident to honor copy machine routine maintenance contracts. Your employee works out of the main office and has clients in both Illinois and Indiana. Your employee spent 21 working days in Illinois. You are not required to withhold Illinois Income Tax because your employees spent less than 31 working days in Illinois. (See the note below.)

Note: Although in these two examples you are not required to withhold Illinois Income Tax, your employees’ income will be taxed by Illinois because they are Illinois residents. Therefore, your employees will file returns in both states. We will give your employees a credit for taxes paid to the other state. If the amount of tax paid to the other state does not cover the Illinois tax liability, your employees may need to make estimated income tax payments to Illinois.

If your employee is “paid in Illinois” and is a resident of Iowa, Kentucky, Michigan, or Wisconsin, you may, but are not required by Illinois law, withhold income tax for the other state.

If your employee is a resident of a state with whom Illinois does not have a reciprocal agreement, you must withhold Illinois Income Tax on all income that is paid in Illinois. You may be required to withhold tax for another state in which the employee works or resides. You should contact those states to determine if you are required to register as a withholding agent.

Form IL-W-4

Your employee must complete Form IL-W-4, Employee’s Illinois Withholding Allowance Certificate. This is your record of the number of allowances that your employee is entitled to claim and would only be disregarded for the following circumstances:

• An employee claims total exemption from Illinois Income Tax withholding, but has not filed a federal Form W-4, Employee’s Withholding Certificate, claiming total exemption.
• The IRS has instructed you to disregard the employee’s federal Form W-4.

If a completed Form IL-W-4 is not filed, or you are required to disregard Form IL-W-4, you must withhold Illinois Income Tax with no allowances.

Note: Most retirement income is exempt from Illinois Income Tax and no withholding is required, even if federal income tax is withheld. However, retired taxpayers may wish to enter into voluntary withholding agreements to avoid having to pay estimated taxes on their taxable income. Retired taxpayers who enter into such voluntary withholding agreements must also complete Form IL-W-4.

If an employee claimed exemption from withholding on federal Form W-4, you still may be required to withhold Illinois Income Tax if the employee’s pay is greater than the Illinois allowance amount. See the example below.

Before December 1 of each year, have your employee review his or her Form IL‑W‑4. If your employee’s Illinois withholding allowances change, the employee must complete a new Form IL-W-4.

Example:

Sam is single, does not have any dependents, and cannot be claimed on another person’s tax return. He works for you part-time. Sam expects to earn $4,000 this year.

Last year Sam earned $3,000, did not have a federal tax liability, and received a total refund of the federal income tax that was withheld from his pay. Sam does not expect to owe any federal income tax this year. Therefore, he claims exemption from withholding on his federal Form W‑4 for this year.

Although Sam may not owe federal income tax, he will owe Illinois Income Tax because he is entitled to only one withholding allowance. The exemption for this allowance is less than his total pay. Therefore, you must withhold Illinois Income Tax from Sam’s pay.

Form IL-W-5

Form IL-W-5, Certificate of Residence in Illinois, is completed by an Illinois resident (not your employee) with whom you have a written contract who

• is paid for performing personal services (e.g., artistic or musical performances, or professional consulting services) and the income earned is taxable under Section 1405.2 of the IITA, or
• receives payment for prizes and awards from a contest conducted entirely in Illinois (e.g., game shows, amateur talent contests, dog or horse shows) and the income earned is taxable under Section 1405.3 of the IITA.

You are not required to provide annual information reports of the amounts you pay in either of these situations. You must however, keep this information in your records and provide it to us if we request.

Note: Instead of completing Form IL-W-5, the recipient may file a certificate of in-state residence on any invoice, billing statement, or contest application submitted to the withholding agent.

Form IL-W-5-NR

To be exempt from Illinois Income Tax withholding requirements you must complete Form IL-W-5-NR, Employee’s Statement of Nonresidence in Illinois, if

• you are a resident of a state (Iowa, Kentucky, Michigan, and Wisconsin) with whom Illinois has a reciprocal agreement, or
• your spouse is in the military, you and your spouse are both residents of the same state (other than Illinois), and you are in Illinois only because your spouse is stationed here by the military or you do not live in the same state as your servicemember spouse, but you have elected to claim their state of residence for tax purposes as allowed by the Veterans Benefits and Transition Act of 2018.

If your employee does not complete this form, you must withhold Illinois Income Tax. If your employee moves out of the state of residence designated on the original Form IL‑W‑5‑NR, the employee must notify you of the change within 10 days and file a new Form IL-W-5-NR, if applicable.

Form IL-W-6 and Worksheet

Form IL-W-6, Certificate of Days Worked in Illinois for Non-Residents, is completed by a non-resident who is paid for performing services within Illinois for more than 30 working days during the taxable year on your employer’s behalf.

Employers are required to have a copy of the certificate and worksheet on file for each non-resident employee who is expected to work more than 30 working days in Illinois and you do not maintain a time and attendance system which

• requires the employee, on a contemporaneous basis, to record the work location for every day worked outside of the state where the employment duties are primarily performed;
• and allows the employer to allocate the employee’s wages for income tax purposes among all states in which the employee performs services.

You are not required to submit this form to IDOR. You must, however, keep this information in your records and provide it upon request.

Check with the Illinois Department of Employment Security (IDES) for more information about unemployment insurance contributions for employers. Visit ides.illinois.gov or call the IDES Employer Hotline at 1 800 247-4984.

Before January 31 of each year, you must give your employee three copies of federal Form W-2, Wage and Tax Statement, or, if applicable, any version of Form 1099 (e.g., Form 1099-MISC, Form 1099-INT, Form 1099-R).

If your employee permanently discontinues employment before the close of the calendar year or you terminate a federal voluntary withholding agreement, you must give the employee (or other person receiving payments subject to withholding) a completed federal Form W-2 within 30 days of the last payment for which withholding was required. You must keep records of all employment records, including undeliverable Forms W-2 and Forms 1099, for at least four years after the date you are required to give the form to the employee.

You are required to electronically file Form IL-941, Illinois Withholding Income Tax Return, quarterly. See Publication 131, Withholding Income Tax Payment and Filing Requirements for more information.

You are required to electronically submit Forms W-2, W-2c, and W-2G to the Illinois Department of Revenue by January 31.

If you are unable to file these forms, or Form IL-941, electronically, you may request Form IL-900-EW, Waiver Request, through our Taxpayer Assistance Division at 1 800 732-8866 or 217 782-3336. The Waiver Request must be completed and submitted back to the Department. You will be notified if the Waiver Request is approved or denied. See Publication 110, W-2, W-2c, W-2G, and 1099 Filing and Storage Requirements for Employers and Payers, for additional information.

For Illinois purposes when completing Form W-2, Box 16, enter the amount of wages paid in Illinois or paid to an Illinois resident employed in a reciprocal state (Iowa, Kentucky, Michigan, or Wisconsin), under the rules in the section “When is compensation paid in Illinois?” even if you withheld other states’ tax on some of those wages or withheld Illinois tax on a different amount. If none of the employee’s wages were paid in Illinois or for an Illinois resident’s employment in a non-reciprocal state, report zero in Box 16 even if you withheld Illinois income tax from those wages. Illinois residents who pay income tax to other states need this information in order to correctly compute the credit allowed for those taxes. Make sure that the sum of the state wages in Box 16 are equal to Box 1.

For Illinois purposes when completing federal Forms W-2G, or any Forms 1099, you must include any Illinois income tax withheld on the line for “State income tax withheld” or “State tax withheld.” Follow the Instructions for the form. Make sure to use the prefix “IL.”