Hiring your first employee changes your business from a tax perspective more than almost anything else you’ll do.
Up to that point, you’ve been dealing with your own return and maybe some 1099s.
The moment somebody goes on payroll, you’re withholding money on behalf of two governments, filing on a schedule you don’t control, and carrying an obligation that doesn’t pause when the work gets busy.
None of the payroll setup for first employee in Illinois is hard.
It’s just a specific list, and the order matters, because a couple of the registrations take longer than owners expect and the first paycheck tends to get scheduled before anyone checks.
What You Need in Place Before the First Paycheck
Start with the federal Employer Identification Number if you don’t already have one. It’s free from the IRS, and you get it immediately online.
Then two Illinois registrations, and this is the part that catches people. You register with the Illinois Department of Revenue for a withholding account, and separately with the Illinois Department of Employment Security for unemployment insurance. They’re different agencies with different accounts, and being registered with one does not register you with the other.
From the employee, you need a federal Form W-4, an Illinois Form IL-W-4, and a completed Form I-9 verifying they’re eligible to work. You’ll also need to report the hire to the state’s new hire directory, and you’ll need workers’ compensation insurance, which Illinois requires of essentially every employer with staff.
Get those in place and the mechanics take over, starting with what actually comes out of the check.
What Comes Out of The Paycheck, And What Comes Out Of You
Two different things happen on every payroll run, and owners routinely conflate them.
Some money is withheld from the employee’s wages: their federal income tax, Illinois income tax at a flat 4.95%, and their share of Social Security and Medicare. That money was always theirs. You’re just the one moving it.
Other money comes out of your pocket on top of the wage. You match the employee’s Social Security at 6.2% and Medicare at 1.45%. You pay federal unemployment tax, and you pay Illinois unemployment tax. None of that is deducted from what they take home, which is why the true cost of an employee always runs above the salary you agreed on. Two of those come down to the unemployment systems, and they do not work the same way.
That employer side is worth pricing before you make an offer, not after.
How much do the unemployment taxes actually cost?
Federal unemployment tax, FUTA, is 6.0% on the first $7,000 of each employee’s wages for the year. That number looks alarming until you get to the credit: employers who pay their state unemployment tax on time generally claim a credit of up to 5.4%, which brings the effective federal rate down to 0.6% on that first $7,000. Pay the state late, and you lose part of the credit, which is one of the quieter ways a small cash-flow problem turns into a larger tax bill.
Illinois unemployment tax runs on its own wage base, and it’s higher. For 2026, it’s $14,250 per employee, so you’re paying Illinois UI on roughly twice as much wage as the federal side.
Your rate depends on your experience. New employers get an assigned rate, and it arrives after you register rather than before, so don’t try to budget it precisely until the notice shows up. Established employers get a rate based on their own claims history, adjusted by a statewide factor the state sets annually. For 2026 that State Experience Factor is 102%, with a fund building rate of 0.550% layered on.
The wage side has its own floor, and Illinois sets that higher than most states too.
Illinois minimum wage sets the floor
Illinois requires $15.00 an hour for workers 18 and older. Where gratuities are involved, an employer may pay 60% of the minimum wage, with tips expected to make up the difference.
For Metro East owners, this is worth pricing carefully, because Missouri sets its own minimum and the two states don’t move together. A business a few miles apart on either side of the river can have a meaningfully different wage floor for the same role, and if you’re hiring against competitors in St. Louis, the comparison your candidate is making probably crosses the bridge.
Which raises the question of what makes payroll here different from payroll anywhere else in Illinois.
What if your employee works across the river?
This is the Metro East complication, and it’s easy to get wrong because it doesn’t follow where your business is registered. It follows where the work physically happens.
If you’re based in Edwardsville and your employee works in Edwardsville, this is a straightforward Illinois payroll. If that employee regularly performs work in Missouri, Missouri withholding enters the picture. And if the work happens inside St. Louis city limits, there’s a 1% city earnings tax that applies to wages earned in the city, on top of everything else.
Plenty of Metro East businesses have somebody who spends real time on the Missouri side without anyone treating it as a multi-state payroll question. It is one. The registrations, the withholding, and the year-end forms all change once work is genuinely being performed in a second state, and it’s much cheaper to set that up correctly than to unwind a year of it.
What you’ll be filing once payroll is running
Payroll isn’t a setup task; it’s a calendar. Federally, you’ll file Form 941 each quarter reporting wages and withholding, and Form 940 annually for federal unemployment. You’ll deposit withheld taxes on a schedule the IRS assigns based on your size, and that schedule is not negotiable.
Illinois has its own returns for withholding and its own quarterly reporting to the employment security side. After year-end, you’ll issue W-2s to employees and file copies with the federal government and the state.
The failure mode here isn’t usually getting a number wrong. It’s missing a deposit deadline in a busy month, which is where the penalties live. Which brings us to who should be holding that calendar.
Should you run it yourself or hand it off?
For one employee, payroll software handles the arithmetic well, and it isn’t expensive. What software doesn’t do is decide whether you’re registered in the right states, whether a worker is properly classified as an employee rather than a contractor, or whether somebody spending two days a week in Missouri has changed your filing obligations.
Those are the questions that cost money when they’re answered wrong, and they’re the ones that don’t announce themselves. A misclassified contractor doesn’t look like a problem until it does, usually years later and with interest attached.
Our view is that most first-time employers should run the software and have somebody check the setup once, properly, before the first paycheck rather than after the first notice.
Getting it Right Before the First Payroll Run
If you’re hiring your first employee in Metro East, the sequence is: EIN, then the two Illinois registrations, then the employee paperwork, then workers’ comp, then pick your payroll system and have the setup reviewed before you run it.
The reason to do it in that order is that the registrations gate everything else, and they’re the part with a waiting period attached.
We handle payroll setup and business tax planning for Metro East and St. Louis businesses, including the cross-border situations that come with operating this close to the state line.
If you’re at the point of hiring, or you’ve already hired and want the setup checked before it compounds, reach out to Thompson Flaherty, and we’ll walk through it with you.
Until next time.
