How to File LLC Taxes in Colorado? (A Complete Guide)
When managing an LLC in Colorado, you must file various business tax forms with the Department of Revenue Taxation Division.
To help you determine the Colorado tax requirements you must meet, we solicited legal advice from our business advisors, who have been in the LLC sector for over twelve years.
We spent three weeks researching the Colorado official Department of Revenue website for the correct tax information.
Here's a detailed guide on filing LLC taxes in Colorado.
Quick Summary
- If your Colorado limited liability company sells tangible property, you must obtain a sales tax license and pay sales tax of 2.9%.
- All LLCs are subject to a 15.3% federal self-employment tax.
- If you select your LLC as a C-Corp, you'll pay a 4.55% corporate tax.
How Are LLCs Taxed in Colorado?
LLCs are taxed in Colorado based on the number of members they have. Also, LLCs are pass-through entities by default, so all business income or losses flow to the members who file personal tax reports. LLC members are responsible for reporting and paying taxes on their share of the business income.
LLCs with elective C or S Corp status have different tax requirements, as we’ll see below.
State Taxes for Colorado LLCs
The structure and number of LLC members determine state taxes for Colorado LLCs.
Here's how:
1. Single-Member LLCs
A single-member LLC in Colorado is taxed similarly to a sole proprietorship. This means the owner accrues the business revenue and pays individual income tax to the IRS. You will also pay self-employment tax of 15.3%.
2. Multi-Member LLCs
A multi-member Colorado LLC with more than one shareholder is treated like a partnership in Colorado for federal income tax purposes.
Paying taxes on the business income shared among members is crucial, as each member is responsible for their share of the business's income and the associated tax obligations.
Therefore, the partnership itself doesn’t file any corporate or state employer taxes.
As a result of LLC pass-through taxation, all profits are shared equitably among the members who will file individual income taxes on their shares.
3. LLCs Taxed as S-corp
If a Colorado LLC is successful in obtaining IRS recognition and S-corp tax treatment, the LLC will only be subject to individual income tax and not corporate taxation.
The distinction is that an LLC with S-corp status can make pre-tax payments to members exempt from the 15.3% self-employment income tax.
File Form 2553 with the IRS to get S-Corp status for your Colorado LLC. Once your application is approved, you'll use Form 1120-S to declare your revenue after obtaining S-corp status.
4. LLCs Taxed as C-corp
LLCs that elect to be taxed as C-Corps are subject to a 4.55% corporate tax on their income. Because corporations are also pass-through entities, Colorado LLC members undergo double taxation as they'll also pay income taxes on their dividends.
Federal Taxes for Colorado LLCs
Colorado levies different federal taxes on limited liability companies. These include:
1. Federal Income Taxes
Any revenues you withdraw from your Colorado LLC are subject to a standard federal income tax return.
Your income, the tax bracket you are now in, your deductions, and your filing status all affect how much income tax you pay.
Only the earnings you withdraw from the firm, minus certain deductions and exemptions, are subject to federal income taxes.
2. Federal Self-Employment Tax
Paying self-employment tax is a requirement for all LLC members or managers who withdraw money from the Colorado LLC.
This tax, which pays for Social Security, Medicare, and other benefits, is handled by the Federal Insurance Contributions Act (FICA).
The current self-employment tax rate in Colorado is 15.3%, and it covers the following:
- 2.9% for Medicare
- 12.4% for Social Security
Read our article and learn how to avoid and reduce self-employment tax.
Colorado State Income Tax
Any money you pay to yourself as a company owner will be subject to the Colorado state income tax of 4.55%. Your personal tax return receives a distribution of these proceeds.
You'll pay state income tax at the srates in Colorado and be eligible to claim the usual tax credits.
Other Taxes
Other taxes your LLC may pay include the following:
1. Sales and Use Tax
Retail sales of tangible or physical personal property are subject to a 2.9% sales tax in Colorado, except for certain services explicitly taxed by law.
Along with the state sales tax, some Colorado counties also levy local sales taxes, which are all managed by the Colorado Department of Revenue.
"A Colorado sales tax license/permit must be obtained and kept up-to-date by every retailer who is obligated to collect sales tax in Colorado. "
- Behzad Gohari, LLC Attorney
2. Colorado Unemployment Insurance Tax
If your limited liability company employs workers, you must pay the Colorado unemployment insurance tax.
If you fall under one of the following categories as a for-profit employer in Colorado, you are normally responsible for paying these taxes:
- You employed at least one person for at least a portion of a day in each of 20 weeks during the previous or current calendar year.
- You paid salaries of at least $1,500.
3. Colorado Workers' Compensation
When a worker is hurt at work, workers' compensation insurance pays for medical expenses and missed wages [1].
A Colorado LLC must obtain workers' compensation insurance regardless of the number of workers and whether they're employed part-time or full-time.
4. Occupational Privilege Tax (OPT)
Occupational privilege taxes (OPT) are levied as a head tax on employees in Colorado. This implies that the tax is due from each eligible employee, and the employer must also pay a part.
Each city establishes an income level to determine whether employees are liable for the tax. The threshold is the minimum wage that an employee in the city must make monthly.
5. Industry Taxes
Colorado also imposes a tax on LLCs operating in certain industries [2].
Here are the common industry taxes in Colorado:
- Cigarette tax
- Tobacco tax
- Marijuana tax
- Fuel tax
- Commercial vehicle tax
- Liquor tax
- Oil and gas severance tax
What is Tax Deductible for an LLC in Colorado?
The tax deductible for an LLC in Colorado includes childcare, employer contribution, capital gain subtraction, and work program credit.
Here's a detailed description of each tax-deductible:
1. Childcare Contribution Credit
A 50% income tax credit of the total eligible donation may be claimed by taxpayers who donate money to support child care in Colorado. A taxpayer can only claim a credit of up to $100,000 for any qualified donations made during the tax year.
2. Employer Contribution Credit
Contributions are eligible for the credit if they satisfy each of the following conditions:
- The employer made the donation.
- The donation is made through CollegeInvest to a 529 college savings plan.
- The owner of the account works for the taxpayer.
- The donation is made in a tax year with a start date on or after January 1, 2019, but before January 1, 2032.
3. Colorado Capital Gain Subtraction
Taxpayers who meet the requirements can deduct some eligible capital gains from their federal taxable income on their Colorado income tax filings.
Only capital gains from qualified property owned by the taxpayer for at least five continuous years before the sale date and purchased on or after May 9, 1994, are eligible for the deduction.
Related articles:
4. Colorado Work Program Credit
Under the "Colorado Works Program," companies in Colorado are allowed to claim a 20% credit against their yearly expenses for qualified services provided to their employees who receive public assistance.
The qualified services include:
- Health/dental services
- Childcare services
- Transportation
- Job training
Other tax credits offered by Colorado include the following:
- Innovative motor vehicle credit
- Investment credit for licensed child and family care centers
- Enterprise zone contribution credit
- Conservation easement credit
- Historic property preservation income tax credit
FAQs
Do Colorado LLCs Pay Franchise Tax?
No, Colorado LLCs do not pay franchise tax, as it's not a requirement there.
What Taxes Do You Pay in Colorado?
The taxes you pay in Colorado include corporate tax, self-employment tax, unemployment insurance tax, sales and use tax, and workers' compensation. You will also pay employee income taxes and LLC’s tax withholding as an employer.
References:
- https://cdle.colorado.gov/dwc
- https://tax.colorado.gov/nicotine-products-tax-guide
