How to Manage Colorado Tax Withholding
Navigate Colorado's tax withholding requirements. This guide clarifies the essential obligations for both employers and employees to ensure accurate processing.
Income tax withholding is the system employers use to prepay an employee’s annual state income tax liability by taking a specific amount from each paycheck and sending it to the state’s revenue department. For most employers paying wages in Colorado, this system is mandatory. This process ensures tax obligations are met gradually throughout the year instead of in one large sum.
Completing the Colorado Employee Withholding Certificate
An employee directs their employer on how much state income tax to withhold using the Colorado Employee Withholding Certificate, Form DR 0004. This form works with the federal Form W-4. If an employee does not submit Form DR 0004, the employer will calculate state withholding based on the federal W-4, which typically results in a higher amount of withholding and a larger potential tax refund.
Completing the form requires entering personal details and deciding on allowances, which are used to estimate your annual tax obligation. Claiming more allowances reduces the tax withheld from each paycheck, increasing your take-home pay. Claiming fewer allowances increases withholding, which can lead to a refund or prevent a tax bill. The form includes worksheets to help calculate the correct number of allowances based on filing status, deductions, and tax credits.
The certificate has a line to request “additional state withholding” per pay period. An employee might use this option if they have other income not subject to withholding, such as from a side business, or if their spouse also works. This extra withholding can help cover the tax liability from that other income.
Registering for a Colorado Withholding Account
Before a business can pay wages for work performed in Colorado, it must establish a withholding account with the Department of Revenue. This makes the business a withholding tax agent for the state. There is no fee to open or maintain this account, and it does not require renewal.
To complete the registration, an employer must gather specific information, including the business’s legal name and address, its corporate structure, and its Federal Employer Identification Number (FEIN). The FEIN is a unique number assigned by the IRS for tax administration and is a primary identifier for the state account.
The primary method for setting up a withholding account is through the MyBizColorado online portal. This platform is a centralized system for various state-level business registrations. Within the portal, the employer will complete the application for a new wage withholding account. After submission, the Department of Revenue issues a unique Colorado Account Number used for all future filing and payment activities.
Employer Filing and Payment Obligations
After registering and receiving withholding certificates from employees, an employer must calculate, file, and remit the withheld taxes. The Colorado Department of Revenue provides Form DR 1098, the “Colorado Withholding Worksheet for Employers,” which offers two approved calculation methods. The Wage Bracket Method uses tables for different pay periods, while the Percentage Method is a direct calculation based on wages and allowances.
The Department of Revenue assigns each employer a filing frequency based on its annual withholding tax liability. Businesses with a liability over $50,000 file weekly, those with a liability between $7,000 and $50,000 file monthly, and those with a liability of $7,000 or less file quarterly. Filings are submitted on Form DR 1094, the Colorado W-2 Wage Withholding Tax Return, which reports the total tax collected.
Returns and payments are submitted through the state’s Revenue Online portal. Most businesses must remit funds via Electronic Funds Transfer (EFT), and it is required for employers reporting over $50,000 annually. After filing the DR 1094 return online, the employer can make the payment through the portal using an e-check or credit card, though processing fees may apply.
Income Subject to Colorado Withholding
The requirement to withhold state income tax extends beyond an employee’s regular salary or hourly pay. Withholding applies to the broader definition of “wages,” which includes most forms of compensation paid to an employee.
Common types of compensation subject to Colorado withholding include bonuses, commissions, and vacation pay. Tips reported to the employer are also considered wages for withholding purposes. Payments made to independent contractors are generally not subject to income tax withholding, as they are responsible for their own tax payments.
Payments from pensions and annuities have distinct rules. Withholding is not automatically required on this income, as a portion may be exempt from state tax depending on the recipient’s age. Individuals aged 55 to 64 can deduct up to $20,000 of this income, while those 65 and older can deduct up to $24,000. A recipient can choose to have tax withheld from these payments by providing instructions to the payer, which can help avoid quarterly estimated tax payments.