What Wages Are Subject to Illinois Unemployment Tax?

The Illinois unemployment insurance (UI) tax system requires employers to contribute to a fund that provides temporary financial assistance to eligible workers who become unemployed. A fundamental aspect of this system is the concept of “subject wages,” which determines the portion of an employee’s earnings on which these taxes are calculated. Understanding which types of payments constitute subject wages is essential for employers to ensure accurate tax calculations and maintain compliance with state regulations.

Defining Subject Wages

In Illinois, “wages” for unemployment insurance purposes are broadly defined and encompass nearly every form of remuneration an employee receives for personal services rendered. This comprehensive definition is rooted in the Illinois Unemployment Insurance Act, 820 ILCS 405. Wages include salaries, commissions, bonuses, and the reasonable monetary value of any non-cash compensation.

The underlying principle is that if a payment is compensation for services performed by an employee for an employer, it generally qualifies as a subject wage. The form of payment, whether cash, benefits, or other valuable consideration, does not typically alter its status as a wage. The Illinois Department of Employment Security (IDES) provides rules for estimating the reasonable money value of non-cash remuneration, basing these on the past experience of workers and employing units. For example, if an employee customarily receives tips, these are also treated as wages received from the employer, provided they are reported.

Common Included Payments

Many types of compensation commonly paid to employees are considered subject wages for Illinois unemployment tax purposes. These include regular salaries and hourly wages. Overtime pay is also fully included.

Performance-based incentives such as commissions and various types of bonuses are considered subject wages. Payments for time off, such as vacation pay, sick pay, and holiday pay, are also included in the taxable wage base. Severance pay, if provided to an employee upon separation from employment, generally counts as a subject wage. The value of certain non-cash benefits, like meals and lodging provided for the employer’s benefit and as a condition of employment, can also be included.

Common Excluded Payments

While the definition of subject wages is broad, several types of payments are specifically excluded from the Illinois unemployment tax base. Certain fringe benefits, designed to enhance employee well-being or provide specific advantages, are often not considered subject wages. Examples include employer contributions to health insurance premiums, retirement plans like 401(k)s or 403(b)s, educational assistance programs, and dependent care assistance. Qualified transportation benefits and de minimis fringe benefits, which are small in value and infrequent, also typically fall under these exclusions.

Payments made to individuals classified as independent contractors are generally excluded, as unemployment insurance applies to employees, not self-employed individuals. Employers must accurately distinguish between employees and independent contractors to ensure proper tax reporting. Reimbursements to employees for legitimate business expenses, provided they are properly accounted for and not disguised compensation, are also typically excluded from subject wages. Payments to certain categories of workers, such as some agricultural laborers or domestic workers who do not meet specific cash wage thresholds, may be excluded.

The Taxable Wage Base Limit

Even when a payment is classified as a subject wage, there is an annual limit on the amount of an employee’s wages that is subject to Illinois unemployment tax. This threshold is known as the taxable wage base. For 2024, the taxable wage base in Illinois is $13,590 per employee, and for 2025, this amount is set to increase to $13,916.

Employers pay unemployment tax only on the first $13,590 (for 2024) or $13,916 (for 2025) of an employee’s annual earnings. Once an employee’s cumulative subject wages for a calendar year reach this amount, any additional wages earned by that employee during the remainder of the year are not subject to Illinois unemployment tax. For instance, if an employee earns $20,000 in 2024, the employer would only pay UI tax on the initial $13,590 of those earnings. The taxable wage base is subject to annual adjustments to reflect economic conditions.