If your small business has employees working in Colorado, you'll need to withhold and pay Colorado income tax on their salaries. This is in addition to having to withhold federal income tax for those same employees. Here are the basic rules on Colorado state income tax withholding for employees.
With rare exceptions, if your small business has employees working in the United States, you'll need a federal employer identification number (EIN). You should obtain your EIN as soon as possible and, in any case, before hiring your first employee. EINs are issued by the IRS and you'll need one first and foremost for federal taxes. In addition, some states use the federal EIN for state withholding tax purposes. Other states (like Colorado) issue separate state tax ID numbers. You'll need an EIN to register with the state (see below). You can apply for an EIN at the IRS website, IRS.gov. Generally, if you apply online, you will receive your EIN immediately.
Apart from your EIN, you also need to establish a Colorado withholding tax account with the Colorado Department of Revenue (DOR). You set up your account by registering with the DOR either online or on paper. (Colorado also considers this as a registration to be a so-called withholding agent.) After registering, you'll receive a Colorado Account Number (CAN). To register online, use Colorado Business Express. If you file online you should receive a CAN immediately. To file on paper, use Form CR-0100, Colorado Sales Tax/Wage Withholding Application. Blank forms are available for download from the Colorado Business Express website. You can file the form by mail or by hand at a DOR walk-in service center. If you file on paper it can take 4-6 weeks to receive your account number. There is no fee to register your business with the DOR for withholding purposes (registering for other purposes can incur a fee).
All new employees for your business must complete a federal Form W-4. Unlike many other states, Colorado does not have a separate state equivalent to Form W-4, but instead relies on the federal form. You can download blank Form W-4s from irs.gov. Clearly label W-4s used for state tax withholding as your state withholding form. You should keep the completed forms on file at your business and update them as necessary. In addition, Colorado requires employers to file W-4s with the DOR for employees who earn more than $200 per week and list more than 10 withholding allowances or an exempt status.
In Colorado, there are three primary payment schedules (filing periods) for withholding taxes: weekly (also known as “frequent”), monthly, or quarterly. There is also a seasonal payment schedule not covered here. Your payment schedule ultimately will depend on the average amount you withhhold from employee wages over time. The more you withhold, the more frequently you'll need to make withholding tax payments.
The exact threshold dollar amounts for the different payment schedules, as well as other rules, may change over time so you should check with the DOR at least once a year for the latest information.
Due dates for payments are:
If the payment is due on a weekend or holiday, the due date is extended to the next business day.
Submit your payment with a withholding tax return. You can do this either electronically or on paper. To file and pay electronically, you can use the DOR's Revenue Online system or Electronic Funds Transfer (EFT). There is a fee to use Revenue Online. Employers with high amounts of withholding must use EFT. To file on paper, use Form DR 1094, Colorado W-2 Wage Withholding Tax Return. You can download blank forms from the withholding tax forms section of the DOR website. You must file a return for every filing period. If there is no wage withholding for a filing period, file a “zero” return.
The DOR provides several different methods for calculating how much tax to withhold. For more information, check the current version of Form 1098, Colorado Income Tax Withholding Tables for Employers. The form is updated every year. You can download a copy from the withholding tax forms section of the DOR website.
After the end of the year, you must file an annual information return—also known as an annual transmittal—with the DOR. The return summarizes the employee taxes you've withheld during the year and transmits state copies of federal Form W-2. The annual information return is in addition to providing each of your employees with a federal Form W-2 that summarizes the employee's withholding for the year.
You must include copies of the W-2s sent to all of your employees working in Colorado when filing the annual information return. Larger employers are required to file electronically. Smaller employers can file either electronically or on paper. To file electronically, use the DOR's Revenue Online system. For details on formatting W-2s for bulk electronic submission, check FYI Withholding 6, Methods of Filing Colorado Annual W-2 Tax Data. To file on paper, use Form DR 1093, Annual Transmittal of State W-2 Forms. If you file on paper, the annual information return and W-2s are due on or before the last day of February. If you file electronically, the due date is the last day of March. As with tax payments, if the due date falls on a weekend or holiday, it is extended to the next business day.
This article is only concerned with employees, not independent contractors. In general, different tax rules apply to independent contractors.
You may decide that it's easiest to hand over responsibility for payroll, including withholding taxes, to an outside payroll service. If so, keep in mind that your business, or even you personally, may still be held directly responsible for mistakes made by an outside payroll company.
This article touches on only the most basic elements of Colorado employee withholding taxes. Avoid possible penalties for making mistakes by checking both the IRS and DOR websites for the latest information. You also can get more information about small business tax issues in other articles here on Nolo.