Bosses who knowingly employ illegal workers could face up to two years in prison under Home Office plans.
The number of compliance officers will be increased
Immigration Minister Liam Byrne announced the new offence as part of a consultation paper on preventing illegal working in the UK.
Under current law, there is no difference between firms which deliberately employ illegal workers and those who are "less than diligent".
Tougher punishments also include higher fines of between £5,000 and £10,000.
Employers will get a "discount" for every illegal worker if they had carried out a partial check, but will still be fined.
As part of its crackdown, the Home Office wants businesses to check whether all prospective workers have the right to work in the UK, as well as continuing to check during the worker's employment.
A pilot scheme for checking the employment status of migrants will run from May to December, before being rolled out next year.
The Home Office said that in order to avoid racial discrimination, employers should treat prospective workers the same and ask them all to produce evidence of their right to work in the UK.
The consultation document also says employers should only ask questions about an applicant's immigration status to confirm whether it would affect their hours - such as a student who cannot work more than 20 hours a week during term.
Mr Byrne said it was a combined approach of making it easier for employers to check, as well as "coming down much harder on businesses which break the rules or turn a blind eye".
"So, alongside compulsory ID cars for foreign nationals will come bigger, faster fines for those who break the law".
The new law will not be retrospective, so bosses will not face responsibilities for people they already employ.
However, he rejected outright any calls for an amnesty of illegal workers.
"An amnesty would be a disaster. It would be a green light for illegal migration to this country," Mr Byrne said.
The Home Office also plans to increase the number of compliance officers from 700 to 1,200, and estimates its budget will be between £10m and £20m.
He said the officers would be connected to the Department of Work and Pensions, Revenue and Customs and the Gangmasters Licensing Authority.
'Great leap forward'
As well as the compulsory ID cards, the Home Office has also introduced tougher checks abroad and a points-based system of migration.
The body for the recruitment industry, Recruitment and Employment Confederation, welcomed the checking service and a campaign to increase awarenes of employers' responsibilities.
Chief excutive Marcia Roberts said: "The move towards providing recruitment agencies and employers with specific information on their immigration enquiries is a great leap forward.
"To date, recruiters have been intensive users of the Home Office¿s Employer Helpline and the new Employers¿ Checking Service will undoubtedly help recruiters make the right decision when it comes to ensuring that candidates have the right to work in the UK."
The consultation is open until August, with the Home Office planning to implement the changes next year.