The Complete Guide To Colorado State Income Tax & Payroll Taxes
If you own a business in Colorado, there are several federal and state tax laws you should know about. Use this handy guide to learn about taxes in your state.
Taxes can be complicated and confusing, and for business owners in Colorado, preparing, filing, and paying taxes may seem downright impossible. But with an understanding of Colorado payroll tax, state and federal tax, and labor laws, taxes don’t have to be such a challenge.
We’ve deciphered complicated Colorado tax, labor, and human resources laws and regulations to help simplify your state taxes. Before diving headfirst into your taxes, use this guide to get a better understanding of the Colorado tax laws that may impact your business.
Table of Contents
Does Colorado Have State Income Tax?
Following the passage of Proposition 116, Colorado state’s income tax rate was set at 4.55% beginning in tax year 2020. This rate applies regardless of your marital status or income bracket.
Federal & State Payroll Taxes In Colorado
If you own a business in Colorado, there are several federal and state tax laws you should know about. By understanding the type of taxes you’ll have to pay, you won’t be surprised when a tax notice shows up in your mailbox. Keep reading to learn more about federal and state taxes in Colorado, including state income tax, property tax, sales tax, and more.
Colorado State Income Tax
Colorado has a flat rate income tax of 4.55%.
The corporate income tax rate in the state is also 4.55%.
Individual state income tax returns and payments are due by April 15. If this date falls on a weekend or holiday, the return and payment will be due on the next business day. An automatic extension is available, although at least 90% of the tax liability must be paid prior to the April 15 due date.
Most Colorado business owners must file returns and submit payments quarterly. Quarterly payments and returns are due on the last day of the month following the end of the quarter.
Employers and employees are required to pay Federal Insurance Contributions Act (FICA) taxes, also known as social security and Medicare taxes.
The current rate for social security taxes is 12.4%. This rate is split evenly between the employer and the employee. The employer withholds 6.2% from employee paychecks and also pays the employer portion of 6.2%.
The Medicare tax rate is 2.9%. This is also split equally between the employer and employee, with the employer paying 1.45% and withholding 1.45% from employee paychecks.
Wage withholdings are submitted quarterly. Even if there are no withholdings, employers must file a zero return on time to prevent receiving a tax notice. Businesses with higher annual withholdings are required to file monthly or weekly returns.
Additional Medicare Tax
An additional Medicare tax of 0.9% must be withheld by employers for wages that exceed $200,000 in a calendar year. The employer is not required to match this payment.
Unemployment Insurance Tax
Businesses in Colorado are required to pay unemployment insurance tax if either of the following conditions is true:
- The business paid $1,500 or more in wages during a calendar quarter in the current or previous calendar year OR
- The business employed at least one worker for any part of a day in 20 weeks during the current or previous calendar year
There are some exceptions for domestic workers, agricultural employers, and nonprofits.
Beginning rates for unemployment insurance tax are based on the business activity of the employer. Beginning rates for 2022 are as follows:
- Non-Construction: 1.7%
- General Construction & Trades: 1.86%
- Heavy Construction: 7.58%
These rates apply to new Colorado businesses. Businesses that have paid wages over a number of quarters will become eligible for a computed rate.
Colorado Property Tax
Across the country, property tax is collected by local governments to pay for schools, roads, libraries, and other services. Business owners in Colorado are also required to pay property taxes. Business owners are generally expected to pay personal property taxes on real estate, including land and property.
In some cases, business owners may also be required to pay taxes on business personal property. Business personal property includes things like:
- Security devices
Some businesses may be exempt from paying taxes on business personal property. Specifically, a law that went into effect on January 1, 2022, made it so that business owners that have business personal property valued at $50,000 or less as determined by the Assessor Market Value are not required to pay business personal property tax.
Colorado Sales Tax
Colorado has one of the lowest sales tax rates in the country at 2.9%. However, in many areas, local sales tax is applied and increases this rate. Taking these local taxes into consideration, sales tax rates in Colorado range from 2.9% to 11.2%.
In Colorado, sales tax is applied to:
- Tangible personal property
- Prepared food & drinks
- Short-term rentals of rooms & accommodations
- Gas & electric service for commercial use
- Intrastate telephone & telegraph services
- Mainframe computer access
- Packing & crating
Real property, intangible personal property, and most services are not subject to sales tax.
Colorado Use Taxes
Colorado’s use tax is 2.9%. This tax applies to purchases made by both businesses and consumers that did not include state sales tax. It also applies to businesses that purchase wholesale inventory that is not sold to customers. Local governments and special districts may also collect use tax.
If consumer use tax is less than $300 for the year, an annual return is filed and the taxes are due by January 20th of the following year. If taxes exceed $300 for a month, a return must be filed by the 20th of the following month. Returns can be filed online or through the mail using Form DR0252 Consumer Use Tax Return.
Colorado State Tax Exclusions & Exemptions
There are a few Colorado tax exclusions and exemptions worth noting. These include:
- Sales Tax-Exempt Organizations: Many charities and non-profits are eligible for sales tax-exempt status. This includes organizations that prevent cruelty to children and animals, religious organizations, literary organizations, and certain organizations that foster national or international amateur sports competitions.
- Out-of-State Sales Tax-Exempt Organizations: Out-of-state tax-exempt organizations can use their home state exemption certificates to do business with Colorado vendors.
Colorado Labor Laws & Other HR Requirements
Whether you’re an employer or employee in Colorado, it’s important to keep up-to-date on the latest labor laws and human resources requirements. From minimum wage and PTO to new hire reporting and child labor laws, here are the laws you need to know.
Colorado Minimum Wage
For most employees, Colorado’s minimum wage is $12.56 per hour. The state minimum wage for tipped employees is $9.54 per hour. If a tipped employee’s wages and tips do not average out to $12.56 per hour, the employer is responsible for paying the difference. In some Colorado cities, the minimum wage may be higher than the state minimum.
Colorado New Hire Reporting
In the state of Colorado, employers are required to report all employees to the Colorado State Directory of New Hires. This includes self-employed and contract employees that have provided their Social Security numbers for tax purposes. It does not include self-employed and contract employees that provided a federal tax ID (FEIN).
All new hires must be reported within 20 days of the first day of work. Reporting can be done through the Colorado New Hire Reporting Employer Services Portal. You will need to provide the employee’s full name, address, Social Security number, and start date. You will also need to indicate if the employee is a contractor.
Colorado PTO Policy
The Colorado Healthy Families and Workplaces Act requires all employers to provide employees with up to 48 hours of accrued paid sick leave and up to 80 hours of leave for public health emergencies.
While no state family leave programs are currently in effect, the Paid Family and Medical Leave Insurance program (FAMLI) was established following the passage of Proposition 118 in 2020. Under the FAMLI program, Colorado employees will have up to 12 weeks of paid leave for childbirth, caring for a sick relative, or other circumstances. An additional four weeks of paid leave will be available for employees or childbirth complications. This will go into effect starting January 1, 2024.
Colorado Labor Laws
There are a number of labor laws in effect to protect workers in the state of Colorado. Some of the most notable labor laws to keep in mind include:
- Nursing Mothers: Public and private employers must provide reasonable paid or unpaid breaks to nursing mothers.
- Meals: Employees are entitled to a 30-minute uninterrupted and duty-free meal for every five consecutive hours worked. If this is not possible, the employee can eat while on duty and must be fully compensated.
- Rest Periods: A paid 10-minute rest period for every four hours of work is required.
- Show-Up Time: State law does not require employers to pay employees for reporting time pay. Employers are only required to pay for services rendered, actual time worked, or times when an employee was permitted to work.
- Uniforms: Employers must pay for uniforms if a special logo, material, color, make, or pattern is required.
Child Labor Laws In Colorado
Minors under the age of 18 are protected under the Colorado Youth Employment Opportunity Act. State law dictates that minors are not allowed to work more than eight hours a day or 40 hours per week.
For minors under the age of 16, these rules also apply. However, minors under the age of 16 are not allowed to work more than three hours per day or a total of 18 hours per week when school is in session. Additionally, they are not allowed to work during school hours without a school release permit and can only work during school hours for work experience, career exploration, and work-study programs.
Minors under the age of 16 are permitted only to work between the hours of 7:00 AM and 7:00 PM. These hours are extended from 7:00 AM to 9:00 PM when school is not in session. This rule does not apply to minors that are 16 or 17 years old or minors that work as models, actors, or performers.
Children as young as 9 may be eligible to perform certain jobs in Colorado. For all minors under the age of 18, Colorado has a list of prohibited jobs including mining, logging, and operating power-driven equipment.
Colorado Payday Law
In the state of Colorado, employers and employees can come to a mutual agreement surrounding pay periods. However, if no agreement is made, state law mandates that pay periods must not exceed the length of one calendar month or 30 days (whichever is longer).
Colorado labor laws further state that regular paydays must be no longer than 10 days following the end of the pay period.
Disability Insurance In Colorado
Employers in Colorado are not required to provide disability insurance to employees. Employees are also not required to purchase a disability insurance policy.
Worker’s Comp Insurance In Colorado
In Colorado, all employers with one or more employees are required to carry worker’s compensation insurance. This applies to full-time employees, part-time employees, and relatives that are paid for work performed. Some exceptions do apply to independent contractors.
Businesses that have a safety program can qualify for up to 10% off of their worker’s comp insurance premiums.
How To Calculate Payroll Taxes In Colorado
Running payroll for the first time can be intimidating. But with a little knowledge under your belt, you’ll be calculating payroll taxes in no time. If you’re a business owner in Colorado, here’s what you need to know about calculating payroll taxes and running payroll for your employees.
Step 1: Determine Your Pay Schedule
Before you pay your employees, you have to determine a pay schedule and stick to it. Some common pay schedules are monthly, semi-monthly, bi-weekly, and weekly. Whatever schedule you select, make sure that you abide by all payday laws in your state. In Colorado, employees must be paid once every 30 days or calendar month (whichever is longer) unless another agreement is in place. Additionally, you must remember to pay your employees within 10 days following the payroll period.
Step 2: Gather Your Documentation & Information
Before you begin running payroll, you need to have a few important items on hand. This includes:
- Employee W-4s
- Employee I-9s
- Employee pay rates
- Time cards or data from time tracking software
- Federal & state tax tables
Step 3: Calculate Employee Hours
In order to accurately calculate employee pay, you’ll need to tally up the hours worked during the pay period for every employee. Use your company time sheets, data from your time tracking software, or another source to calculate the hours worked by each employee.
Step 4: Calculate Gross Pay
Once you know how many hours each employee worked, you’ll need to calculate gross pay — in other words, the employee’s total pay prior to taxes and deductions. You’ll need to have the total hours worked for each employee as well as each employee’s pay rate.
For hourly employees, you will simply multiply the number of hours worked by the hourly wage. For example, if an employee worked 74.5 hours and is paid $22 per hour, their gross pay would be $1,639.
For salaried employees, the calculations look a little different. To get gross pay, take the annual salary of the employee and divide it by the number of pay periods in a year. Let’s say that an employee makes $54,000 per year and the pay schedule is bi-weekly (26 pay periods in a year). Divide $50,000 by 26, and you’ll get $2,076.92. This is the employee’s gross pay.
Step 5: Calculate Payroll Taxes
Next, you’ll need to calculate taxes. As a reminder, this includes:
- Federal income tax
- State income tax
- Local taxes
To get started, convert any percentages to decimals. To do this, divide the percentage by 100. For instance, the FICA tax rate is 6.2%. By dividing 6.2 by 100, we’ll get 0.062. This number can then be multiplied by the gross pay calculated in the previous step to determine the state income tax to withhold.
Using the example from the hourly employee, we can multiply $1,639 by 0.062. After doing the math, you’ll see that $101.62 should be deducted from the employee’s pay. And don’t forget that you’ll also have to match this payment when submitting your withholdings.
After doing all of your tax calculations, subtract the total amount from the gross pay, and you’re one step closer to finishing payroll.
Step 6: Subtract Deductions
In addition to taxes, there may be deductions that are taken from your employees’ paychecks. There are two main types of deductions: pre-tax and post-tax.
Pre-tax deductions are taken before taxes are taken out. These include:
- Health insurance
- Health savings accounts (HSAs)
- Retirement plan contributions
- Health insurance contributions
Post-tax deductions are taken out after taxes have been withheld. Some examples of post-tax deductions are:
- Life insurance
- Disability insurance
- Union dues
- Wage garnishments
Pre-tax and post-tax deductions need to be calculated, added up, and subtracted from the employee’s pay, along with the taxes calculated in the previous step. Once all deductions and taxes have been taken, this final total is the employee’s net pay, also known as take-home pay.
Step 7: Run payroll
Once you’ve completed all calculations for each employee, you will need to run payroll. You can manually set up direct deposit and/or run paper checks. Or you can simplify the entire process with payroll software. Not only will payroll software make it easier than ever to pay your employees on time, every time, but it also does the heavy lifting for you.
From automatically calculating taxes to allowing you to set up automatic payroll, payroll software can help save hours each month doing payroll, while also helping you avoid making errors. Ready to save time each pay period? Check out our picks for the best payroll software for small businesses to find the right option for your business.
Step 8: File Your Returns & Make Tax Payments
Remember the withholdings from earlier? You will need to submit those payments (the employee portion and your own) each quarter. Payments are due on or before the last day of the month following the end of the quarter. You must file a return by the deadline for each quarter, or you will receive a delinquency notice. If no money is owed, you must file a zero return.
The easiest way to pay taxes due is online. You pay by credit card or eCheck through the Colorado Department of Revenue’s Revenue Online site, or do an electronic funds transfer (EFT) through the Department of Revenue website. To submit by mail, you must fill out Form DR 1094 and submit it along with a check to the Colorado Department of Revenue.
The Department of Revenue also has a number of other withholding forms that your business may need.
Colorado Payroll Tax & Other Resources
Failure to withhold taxes, pay business taxes, or comply with tax and HR regulations can all be costly mistakes. This is why it’s important for Colorado business owners to keep up-to-date on payroll tax and other tax-related laws. There are plenty of state resources at your disposal, such as the Department of Labor and Department of Revenue, to get the latest tax news and updates.
Of course, Merchant Maverick also has plenty of resources to help your business, whether it’s helping you navigate taxes or finding the best small business loans in Colorado. Be sure to check out The Ultimate Payroll Taxes Guide For Small Businesses to learn more about payroll taxes — we cover everything from what they are to due dates — and while you’re at it, check out our other tax content. Good luck!
Also, did you know that Colorado was the leader in our Merchant Maverick data report about the 10 best states for women-led startups in 2022? Read the report to find out why and to predict how Colorado will fare in the future.