What actually happens
An employee who lives in Indiana and performs work in Illinois sits in two tax systems at once. The residence state claims the right to tax all of a resident's income wherever earned; the work state claims the right to tax income sourced within its borders. Absent an agreement, both claims stand, and the conflict is resolved after the fact through a credit on the resident return rather than up front in payroll.
When Illinois withholding starts
Illinois applies a de minimis test of 30 working days before nonresident withholding begins. Per Publication 130, Illinois withholding is not required on compensation paid to a nonresident employee who has performed fewer than 31 days of service in Illinois in the year and whose compensation is not localized in Illinois. In practice: more than 30 working days in Illinois triggers withholding.
The trap is that thresholds are usually retroactive to the first day once crossed. An employee who spends 40 days in a 30-day-threshold state does not owe tax on 10 days; they owe it on all 40, and the employer is the one who failed to withhold.
Unemployment insurance goes to one state only
Income tax can be split between states. Unemployment insurance cannot. Under the localization test used by every state, an employee whose services are performed entirely in Illinois is covered by Illinois for unemployment purposes, and all wages are reported there — regardless of where they live, where you are headquartered, or which state's income tax you withhold. Illinois's 2026 taxable wage base is $14,250. The four-factor test in order.
Local taxes are a separate problem
Indiana: EVERY Indiana county imposes a Local Income Tax (LIT), withheld by the employer. CRITICAL: Indiana's reciprocity agreements do NOT cover county LIT -- employers must still withhold county tax from residents of reciprocal states who have a principal place of employment in an Indiana county as of January 1. Employees expecting 30 or fewer Indiana workdays may file Form WH-4AFF to claim a county tax exemption.
What you have to register for
| Obligation | State | Agency |
|---|---|---|
| Income tax withholding | Illinois | Illinois Department of Revenue |
| Unemployment insurance | Illinois | Illinois Department of Employment Security (IDES) |
Frequently asked
Do Illinois and Indiana have a reciprocal tax agreement?
No. There is no reciprocal agreement between Illinois and Indiana. Illinois taxes wages earned in the state by nonresidents, and Indiana taxes the same wages as resident income while allowing a credit for tax paid to Illinois.
Which state's income tax should be withheld?
Illinois, as the state where the work is performed. Indiana also taxes the income as a resident, but the employee claims a credit on the Indiana return for tax paid to Illinois.
Which state gets the unemployment insurance wages?
Illinois. Unemployment coverage is never split between states for a single job. The localization test assigns the whole job to the state where services are performed, which here is Illinois, regardless of residence or where the employer is headquartered.
How many days can an employee work in Illinois before withholding starts?
Illinois applies a de minimis test of 30 working days. Once the limit is crossed, most states require withholding on all in-state wages for the year, not just the excess.