The Complete Guide To Colorado State Income Tax & Payroll Taxes

Colorado payroll can be complex because employers may need to handle federal payroll taxes, Colorado income tax withholding, unemployment insurance, Paid Family and Medical Leave Insurance, and any local occupational privilege taxes that apply.

Colorado employers also need to follow state labor rules for minimum wage, overtime, paid sick leave, wage statements, payday requirements, workers’ compensation, and payroll recordkeeping.

This guide breaks down the Colorado payroll taxes and labor laws small business owners need to know.

Does Colorado Have State Income Tax?

Colorado has a flat state income tax, which means the same rate applies regardless of income level or filing status.

For tax year 2025, Colorado’s individual income tax rate is 4.40%. Employers should use the current Colorado Department of Revenue withholding guidance when calculating Colorado wage withholding because the state income tax rate can change by tax year.

Federal & State Payroll Taxes In Colorado

Colorado employers may need to handle federal payroll taxes, Colorado wage withholding, unemployment insurance, and Paid Family and Medical Leave Insurance premiums. Some Colorado cities may also have local occupational privilege taxes.

Colorado businesses may also be responsible for other taxes, such as sales, use, or property taxes, but those are separate from payroll taxes.

Colorado State Tax Exclusions & Exemptions

Colorado payroll tax exemptions depend on the type of worker, type of wages, and payroll tax involved. In general, Colorado employers must handle wage withholding, unemployment insurance, and FAMLI premiums unless a specific exemption applies.

Some workers or wages may receive special treatment for Colorado wage withholding, unemployment insurance, or FAMLI. Independent contractors are also treated differently from employees; businesses generally do not withhold payroll taxes for properly classified contractors, but contractors are responsible for their own tax obligations.

Colorado businesses may qualify for other tax exemptions, such as sales tax exemptions for certain nonprofits, but those are separate from payroll taxes.

Colorado Labor Laws & Other HR Requirements

Colorado employers need to follow state and federal labor laws covering minimum wage, new-hire reporting, paid sick leave, paid family and medical leave, meal and rest breaks, child labor, paydays, disability insurance, workers’ compensation, and payroll recordkeeping.

How To Calculate Payroll Taxes In Colorado

Once you understand Colorado payroll taxes and labor laws, running payroll comes down to choosing a pay schedule, collecting employee forms, calculating gross pay, withholding taxes, submitting payments, and keeping accurate records.

Step 1: Determine Your Pay Schedule

Choose a regular pay schedule before running payroll. Common pay schedules include weekly, biweekly, semimonthly, and monthly.

Colorado employers and employees may agree on pay periods. If there is no agreement, pay periods generally cannot exceed one calendar month or 30 days, whichever is longer. Regular paydays must generally be no more than 10 days after the end of the pay period.

Step 2: Gather Employee Payroll Documents

Before running payroll, collect the forms and information needed to pay employees correctly, including:

• Form W-4 for federal income tax withholding
• Colorado Form DR 0004, if the employee chooses to complete Colorado-specific withholding adjustments
• Form I-9 to verify employment eligibility
• Employee pay rate, pay schedule, classification, and deduction information
• Timecards or time-tracking data, if applicable

Step 3: Calculate Gross Pay

Calculate each employee’s gross pay before taxes and deductions.

For hourly employees, multiply hours worked by the hourly rate and include overtime when required. For salaried employees, divide the annual salary by the number of pay periods in the year.

Include bonuses, commissions, tips, PTO, sick leave, reimbursements, and other taxable compensation when applicable.

Step 4: Calculate Taxes & Premiums

Colorado employers must withhold federal income tax based on each employee’s Form W-4. Employers must also withhold Colorado wage withholding based on Colorado withholding guidance and the employee’s withholding information.

Employers and employees also pay FICA taxes. Social Security and Medicare apply at the federal level, and employers must also withhold Additional Medicare Tax from employee wages over the federal threshold when applicable.

Colorado employers may also need to pay unemployment insurance premiums and handle FAMLI premiums. For 2026, Colorado’s FAMLI premium rate is 0.88% of wages, generally split between employers and employees. Employers with fewer than 10 employees are not required to pay the employer share, but they still need to collect and remit the employee share.

Step 5: Subtract Deductions

After calculating payroll taxes and premiums, subtract any required or employee-authorized deductions.

Common deductions include:

• Health insurance premiums
• Retirement plan contributions
• Health savings account contributions
• Wage garnishments
• Child support payments
• Union dues
• Other approved employee deductions

Step 6: Pay Employees

After calculating gross pay, taxes, deductions, and net pay, pay employees using an allowed payment method, such as direct deposit, paper check, or another approved method.

Payroll software can help automate tax calculations, wage payments, payroll reports, and recurring payroll schedules.

Step 7: File Returns & Make Tax Payments

Colorado employers must file required payroll tax returns and submit payments on time. Colorado wage withholding can be filed and paid through the Colorado Department of Revenue’s Revenue Online system or by using applicable withholding forms.

Colorado employers may also need to submit unemployment insurance and FAMLI wage reports and premium payments through the appropriate state systems.

Step 8: Keep Payroll Records

Keep payroll records organized and secure. Records should include employee names, Social Security numbers, addresses, pay rates, hours worked, pay periods, payment dates, deductions, and tax records.

The IRS generally requires employment tax records to be kept for at least four years. FLSA payroll records should generally be kept for at least three years, while wage calculation records, such as timecards and work schedules, should generally be kept for at least two years.

Colorado Payroll Tax & Other Resources

For official guidance, use the Colorado Department of Revenue for wage withholding and income tax guidance. Use the Colorado Department of Labor and Employment for unemployment insurance, FAMLI, minimum wage, wage claims, payday rules, workers’ compensation, and labor law updates.

For federal payroll rules, use the IRS for federal withholding, FICA, FUTA, and employer tax filing guidance, and the U.S. Department of Labor for FLSA wage, overtime, and recordkeeping requirements.

Merchant Maverick also has plenty of resources to help your business, including our full payroll tax guide.