Employers generally understand that employees need time off from work without having to worry about losing pay. For this reason they give employees paid vacation days. Illinois spells out regulations for vacation days offered by employers. The Illinois Department of Labor enforces these laws.
In Illinois, if a collective bargaining agreement (contract) between an employer and an employee says the employee will get paid vacation time, the employer must honor the terms of the contract. The amount of time given is up to the employer. The employee may take the time off at her discretion. Typically, employers give vacation time based on accrual of service. For example, employees with less than one year of service might get nine vacation days a year and an employee with two years of service might get 11 days. The employer may base the determination on the employee’s anniversary date (employment start date) or by calendar year. Some employers require employees to request vacation time in writing within a specified time frame, such as two weeks before they take their time off.
Under the Illinois Wage Payment and Collection Act, unless the employment contract says otherwise, if an employee quits or is terminated and has unused vacation time, the employer must pay the employee for unused vacation accrual. The employer must pay the unused accrual with the employee’s final pay at her final pay rate. For example, if she has eight vacation days left for the year but quits before taking those days, the employer must pay the eight days at her regular pay rate with her last paycheck. Final compensation must be paid in legal U.S. money, by check or deposited into the employee’s bank account. The full pay should be readily available to the employee. Illinois employees can file a wage claim with the Illinois Department of Labor if they do not receive their vacation pay as per the employment contract or policy.
The Internal Revenue Service recognizes vacation pay as a fringe benefit. However, it is computed as wages by the employer and included on the employee’s yearly W-2. Consequently, vacation pay is taxable. The IRS requires Illinois employers to withhold federal income tax, Social Security tax and Medicare tax from employees’ wages. Illinois requires employers also to withhold state income tax. The employer should tax vacation pay as though taxing regular wages. The Illinois income tax rate is generally 3 percent of taxable wages, according to the Illinois Department of Revenue. The employer can use IRS Circular E to figure federal withholding and the Illinois withholding tax tables for state income tax.