How to Handle LLC Taxes in Colorado
Understand how your LLC's federal tax election impacts Colorado state income, sales, and payroll tax obligations. Learn the process from registration to filing.
A Limited Liability Company (LLC) provides liability protection to its owners, who must manage federal, state, and local tax responsibilities in Colorado. An LLC’s federal tax classification determines its state and local tax obligations.
Federal Income Tax Classifications for LLCs
The Internal Revenue Service (IRS) does not have a dedicated tax classification for LLCs, instead using a “pass-through” system where profits are taxed on the owners’ personal returns. The default treatment depends on the number of members. A single-member LLC is considered a “disregarded entity,” meaning the IRS treats it like a sole proprietorship for tax purposes. The owner reports all business income and expenses on Schedule C, filed with their personal Form 1040.
An LLC with two or more members is automatically classified as a partnership. The LLC files an annual informational return, Form 1065, and provides each member with a Schedule K-1 detailing their share of profits or losses.
An LLC can also elect a different tax status. By filing Form 2553, an eligible LLC can be taxed as an S corporation, which may offer savings on self-employment taxes. This is because only the owner’s salary is subject to these taxes, not the additional profit distributions. To qualify, an LLC must meet several requirements, including:
- Being a domestic entity
- Having no more than 100 members
- Having only U.S. citizens or residents as members
- Having only one class of stock
An LLC can file Form 8832 to be taxed as a C corporation. This makes the LLC a separate tax-paying entity that files Form 1120. The corporation pays tax on its profits, and shareholders are taxed again on dividends, a system known as “double taxation.” This structure can be strategic for businesses that plan to reinvest significant earnings.
Key Colorado State and Local Taxes
Colorado’s income tax system aligns with federal LLC classifications. Profits from pass-through LLCs flow to the members, who report the income on their personal state returns and pay Colorado’s 4.25% individual income tax. If an LLC elects to be taxed as a C corporation federally, it must also pay Colorado’s 4.25% corporate income tax on its net income.
If your LLC sells taxable goods or services in Colorado, you must obtain a license to collect and remit sales tax. This is required if you have a “nexus” (a connection) with the state. For remote sellers, economic nexus is established when retail sales into Colorado exceed $100,000 in a calendar year. Tax rates are a combination of the statewide rate and various local rates.
Businesses owe use tax on taxable items purchased for use in Colorado if the seller did not collect state sales tax, which is common for out-of-state purchases. The state use tax rate is 2.9%. Businesses must track these purchases and remit the use tax to the Colorado Department of Revenue (CDOR).
LLCs with employees must withhold state income tax from wages and remit the funds to the CDOR. Employers must also pay state unemployment insurance (SUI) taxes, which fund benefits for unemployed workers.
LLCs must also manage local taxes, which can include more than just sales tax. For example, the Denver Occupational Privilege Tax (OPT) applies to any employee or owner earning at least $500 in a month. The employer pays $4.00 per month for each employee, and the employee pays $5.75 per month through withholding.
Registering Your LLC for Colorado Taxes
The first step in tax registration is obtaining a Federal Employer Identification Number (EIN) from the IRS. This unique nine-digit number is required for all multi-member LLCs, any LLC with employees, and any LLC that elects to be taxed as a corporation. While a single-member LLC with no employees can sometimes use the owner’s Social Security Number, obtaining a free EIN online is recommended for opening a business bank account.
State registration is handled through MyBizColorado, a multi-agency portal that streamlines the process. This platform allows you to register with the Secretary of State, Department of Labor and Employment, and the Department of Revenue in a single process. You will provide your LLC’s legal name, EIN, address, and owner details. The portal then establishes the necessary tax accounts, such as for sales tax or wage withholding. Upon completion, the CDOR issues an eight-digit Colorado Account Number (CAN) to use for all state tax filings.
How to File and Pay Colorado Business Taxes
Filing returns and paying taxes is managed through the Colorado Department of Revenue’s (CDOR) Revenue Online portal. Using your Colorado Account Number (CAN), you can access your specific tax accounts, file returns, and make payments electronically.
The CDOR determines your filing frequency for taxes like sales tax based on your business volume. For example, businesses collecting $300 or more in sales tax per month must file monthly, while others may file quarterly. A return must be filed for every period, even if no tax was collected.
Most business tax returns and payments are due on the 20th of the month after the reporting period ends. If the deadline falls on a weekend or holiday, it moves to the next business day. Colorado offers a vendor’s fee as a discount for timely sales tax filing and payment. However, this fee is capped at $1,000 per period and is not available to retailers with over $1,000,000 in annual net taxable sales.
The Revenue Online portal offers payment by Electronic Funds Transfer (EFT) from a business bank account or by credit/debit card. The CDOR requires businesses with annual state sales tax liabilities over $75,000 to pay via EFT. Using the online system is the standard way to meet filing and payment deadlines.