A Complete Guide to Payroll & Payroll Taxes for Colorado

Senate Bill 233 was probably the most significant bill of the year 2019, and it was enacted during a frantic legislative session that few outside the Gold Dome were aware of. According to the nonpartisan fiscal note, state revenue will have no impact. If the state loses two notable legal cases, the consequences might be severe—the measure intends to provide the state with a last-minute advantage in two cases.

Before introducing the bill on April 2, lawmakers had no advance notice. The governor's office did not reply to queries regarding the measure from the press. The shell firms have no property or payroll in Colorado, despite claiming to be based there. State tax authorities contend that this has traditionally suggested that the "water's edge" exemption should not apply. A measure would have codified what the Department of Revenue has long regarded as state policy.

Legislators stripped legislative purpose wording from a measure that would have required shell businesses to pay income taxes. If the court decides against the state, the bill's effect on tax revenue will be null and void.

Continue reading a complete guide to Colorado Payroll Taxes to know more.

Table Of Contents

Colorado, Payroll Taxes–Summary of the Enacted Bill

In certain circumstances, two or more organizations managed by the same interests must submit a combined report for apportioning income for Colorado income tax purposes. The Colorado Court of Appeals recently interpreted existing law to exclude all holding companies that purportedly do not have property or payroll from combined reports.

The act specifies that only corporations with property and payroll in countries other than the United States are exempt from filing a joint notice. The act also defines when to treat the partnership activities as the affiliated group of the corporation's member activities.

The act requires the revenue department to convene a stakeholder working group to discuss and report combined tax reporting issues.

Colorado, Payroll taxes– Implementation of Flat Income Tax

The personal income tax enactment was Colorado's single largest source of revenue in 1937. The tax applies to the majority of individuals and non-corporate businesses.

The state income tax had graduated rates for the first fifty years, with higher income earners subject to higher tax rates than lower-income earners. It began with the tax year 1987; the state legislature simplified the state income tax by enacting a single, or "flat," tax rate that applied to all income brackets. Individual income tax revenue is subject to the TABOR Amendment's revenue and expenditure limitations.

Colorado, Payroll taxes–Paying Taxes in Colorado

Individuals and some businesses pay individual income taxes through withholding or estimated payments. Employment compensation and earnings from specific other income sources (such as pensions, bonuses, commissions, and gambling winnings) are deducted from an employee's paycheck by their employer—the calculation of the amount withheld from wages and salaries using Colorado form DR 1098.

Individual income tax returns (Form 104 and any tax payments owed) for a calendar year are due to the Colorado Department of Revenue on or before April 15, if not for an extension. These forms allow taxpayers to calculate and report the already paid income tax to the state of Colorado through withholding and estimated payments and the outstanding amount for a particular tax year. The Department of Revenue's filing guide holds detailed instructions for completing Colorado Individual Income Tax Form 104.

Payroll Taxes In Colorado–Tax Rate

You can calculate the Colorado income tax liability of a taxpayer as follows:

The federal taxable income serves as the foundation for the Colorado income tax, and any policy that affects federal taxable income affects Colorado taxable income. Taxpayers can calculate Colorado income tax by applying a "flat" tax rate of 4.55 percent to federal taxable income after adjusting for state additions and subtractions; we have a list of the most significant and most common below.

Colorado income tax credits are then deducted from this total to determine the net Colorado income tax (the amount paid by a Colorado taxpayer). In its biennial Tax Profile and Expenditure Report, the Department of Revenue publishes information on income tax expenditures, including subtractions, deductions, and credits.

Colorado, Payroll taxes– Additions

Any state income tax-deductible in federal itemized deductions
Interest in non-Colorado state and municipal bonds
Only for 2020, the portion of any federal net operating loss deduction, excess business loss deduction, and business interest income deduction attributable to CARES Act-enacted federal tax policy changes
Any federally qualified business income deduction for taxpayers with income exceeding $500,000 (if filing separately) or $1,000,000 (if filing jointly) from 2021 to 2025
The amount of any charitable contribution was deducted as an IRS deduction and claimed as a gross conservation easement credit on the Colorado return
the amount spent on undocumented alien labor services
Beginning in 2022, the amount by which the federal itemized deduction exceeds $30,000 (if filing single) or $60,000 (if filing jointly) for taxpayers with an adjusted gross income of more than $400,000 (if filing jointly)

Colorado, Payroll taxes–Subtractions

Any interest or investment income from U.S. government commitments that is not subject to Colorado income tax
Pension or annuity tax liability of up to $20,000 includes the federal return for those aged 55 to 65 and up to $24,000 for those aged 65 and older
PERA contributions from 1984 to 1986 and Denver Public School retirement savings contributions from 1986
The amount contributed to a Colorado medical savings account that remains unclaimed as a deduction on the taxpayer's federal tax return
Any Colorado income refund included in federal taxable income
Up to $20,000 (if filing alone) or $30,000 (if filing jointly) in qualified state tuition programs; charitable contributions that qualify
Expenses incurred while carrying out wildfire mitigation measures
And, for 2021 only, the portion of any federal net operating loss deduction, excess business loss deduction, and business interest income deduction attributable to the CARES Act was previously not deducted from Colorado tax liability in 2020 and years past

Payroll Taxes In Colorado–Tax Credit

Some credits are available for both individual and corporate income taxes Most tax credits limit themselves to the extent of the taxes they owe and are thus non-refundable. Unused credits may be carried over and used in future tax years for some non-refundable tax credits. Any credits left over after taxes are refundable to the taxpayer for refundable tax credits.

For Whom is it Mandatary to File Payroll Taxes In Colorado?

If you live in Colorado for any portion of the year and earned income, you are eligible to file a Colorado tax return. You may also be required to file taxes if you did not live in Colorado but worked for a company that did. Contact the Colorado Department of Revenue Taxation Division for more information on filing eligibility.

Companies based in Colorado will also have to pay state income taxes. At 4.63 percent, the top corporate income tax rate is low, and the state is ranked 21st in the nation in the State Business Tax Climate Index Rating.

Colorado, Payroll taxes–Is the Colorado Sales Tax rate is Lowest?

Colorado imposes a 2.90% sales tax, with localities charging 4.75% for 7.65 percent. Unlike some other states, Colorado does not currently have any sales tax holidays.

The state levies various taxes on various items. The gasoline tax of 22 cents per gallon is among the lowest in the country (42nd). Meanwhile, the national cigarette tax of $0.84 (dollars per 20-pack average) is ranked 31st.

Colorado provides a variety of tax credits, ranging from the Earned Income Tax Credit to a discount for paying taxes in another state. The Colorado Department of Revenue Taxation Division has all the information you need to determine whether you are eligible for one of their credits. You can also file your state income taxes and pay any amounts due while you're there.

Payroll Taxes In Colorado–Distribution of State Taxable Income

As per Amendment 23, you can credit one-third of one percent of state taxable income to the State Education Fund, and it amounts to approximately 7% of total income tax revenue from personal and organization income taxes.

The authorities can spend money from the State Education Fund on "accountable education reform, accountable programs to meet state academic standards, class size reduction, expanding technology education, improving student safety, expanding the availability of preschool through kindergarten programs, performance incentives for teachers, accountability reporting, or public school building capital construction." The remaining revenue from income tax adds to the General Fund for spending on general operations.

Payroll Taxes In Colorado–Income Tax Withholding Requirements

If your small business employs people in Colorado, you must withhold and pay Colorado income tax on their wages. In addition, those same employees must have federal income tax withheld. The following are the fundamental rules for Colorado state income tax withholding for employees.

Get An Employer Identification Number (EIN)

Except in rare cases, you'll need a federal employer identification number (EIN). For state withholding tax purposes, some states use the federal EIN. The IRS website, IRS.gov, is where you can apply for an EIN. In most cases, if you apply online, you will receive your EIN almost immediately.

Register With the Department of Revenue

You need a Colorado withholding tax account with the Colorado Department of Revenue, and the DOR does not charge a fee to register your business for withholding purposes. If you file online, you will immediately receive a Colorado Account Number (CAN); it may take weeks if you file on paper.

Completing Withholding Tax Forms for New Employees

Colorado does not have a state corresponding to Form W-4, so it must rely on the federal form. Keep the completed forms on file at your company and update them whenever applicable.

Payroll Taxes In Colorado–Scheduled Withholding Tax Payments and Returns to file

There are three key payment timeframes (filing times) for withholding taxes in Colorado. The more you withhold, the more frequently you must pay withholding tax. You can calculate your payment process will ultimately as the average sum withheld from employee wages.

Payments are due on the following dates:

Payments are due on or before the third business day after the previous Friday. Filing periods are always complete on Friday. There is one exception: at the end of the year, weekly filers must transmit all taxes withheld for all payrolls through December 31
Make payments by the 15th of the month following the month you withheld tax
Payments are due quarterly by the last day of the month following the end of the quarter
The deadline is moved to the following business day if the payment is due on a weekend or holiday

The Department of Revenue (DOR) offers several methods for determining how much tax to withhold. Send your payment along with a withholding tax return. For each filing period, you must file a return. File a "zero" return if there is no wage withholding during the filing period.

Payroll Taxes In Colorado–Fill out an Annual Information Return

You must file an annual information return with the DOR after the end of the fiscal year. The return summarizes the employee taxes you withheld during the year and sends state copies of federal Form W-2 to the IRS. Larger employers must file electronically; smaller employers can file on paper or electronically.

Payroll Taxes In Colorado–Using Payroll Service Providers

You may decide that it is easier to delegate payroll responsibility to an outside payroll service, including withholding taxes. If this is the case, keep in mind that your company, or even you personally, may be held directly liable for errors made by an outside payroll company.

Payroll Taxes In Colorado– Income Tax Checkoffs

Each year, only 20 checkoff programs are permitted to appear on the individual income tax form. Tax check-offs must have a sunset date and a yearly minimum contribution of $50,000 by the third year after they first appear on the form. According to the priority order system, continuing or renewed programs take precedence over newly created programs.

The Colorado Department of Revenue's personal income tax form includes the following checkoffs.

Nongame and Endangered Wildlife Cash Fund
Colorado Domestic Abuse Program Fund
Homeless Prevention Activities Program Fund
Western Slope Military Veterans Cemetery Fund
Pet Overpopulation Fund
Military Family Relief Fund
American Red Cross Colorado Disaster Response, Readiness, and Preparedness Fund
Habitat for Humanity of Colorado Fund
Special Olympics of Colorado Fund
Colorado Healthy Rivers Fund
Alzheimer's Association Fund
Colorado Cancer Fund
Make-a-Wish Foundation of Colorado Fund
Unwanted Horse Fund
Urban Peak Housing Support Services for Youth Experiencing Homelessness Fund
Young Americans Financial Education Fund; and
Donate to Colorado Nonprofit Fund

Colorado Payroll Taxes– Federal Taxes

Unless you file an extension, federal income tax returns are due to the IRS on April 15. Other sources of income may be required to be reported on separate forms by some taxpayers. Dividends and interest earnings, for example, are reported on Schedule B of Form 1040. You can report and file estimated tax on Form 1040-ES by April 15 of each year or quarterly installments by April 15, June, September, and January.

Calculate the federal taxable income as gross income (all sources of income) less any tax deductions and exemptions for which a taxpayer may qualify. Multiply the marginal federal taxable income tax rates, and subtract tax credits from this amount.

Colorado, Payroll Taxes–What Else Should You Know About Colorado State Taxes?

Conclusion

The Colorado Nongame and Endangered Wildlife Fund were the first State Income Tax Checkoff Fund in the United States during its establishment in 1977. Since then, checkoffs have grown in popularity across the country. In a 2003 survey by the Federation of Tax Administrators, 220 checkoff programs for the tax year 2002 were identified across 41 states and the District of Columbia.

According to the National Conference of State Legislatures, there were 421 programs in 2018. In the tax year 1972, taxpayers were allowed to designate $1 of their income tax liability to a presidential campaign fund, launching the first national checkoff program for payroll taxes in Colorado.

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Key Takeaways

If you are a resident or nonresident of Colorado and receive income from a Colorado source, you must pay payroll taxes in Colorado
The credit for leased passenger vehicles is $1,500
The credit is reversible
If you receive income from Colorado and are required to file a federal tax return, you must also file a return on payroll taxes in Colorado
Taxes on Capital Gains
Colorado residents can deduct certain capital gains from their state tax returns
Payroll taxes in Colorado does not include inheritance or estate tax