A company I worked for paid wages to a person for phone solicitation. The person was 1099'd at the end of the year. The person then went & made a claim for unemployment benefits. The IL Dept of Unemployment determined that the person was in fact an employee, not a sub, and that he is owed unemployment.

My question is this: We are going to owe 5.2% on his unemployment, no big deal. The concern we have is that since IDES has made him legally an employee, does that mean we have to go back & redo all of our federal and state items also? We would then have to issue him a W2 for last year's taxes & void the 1099? We will both then owe federal & state taxes?

Yes, if he was not a 1099 employee you owe all of the taxes on him.