Colorado Income Tax Explained: Rates, Residency Rules, and Filing Deadlines

Colorado’s income tax system may look simple because of its flat income tax rate, but real compliance involves several layers, including state registration, quarterly filings, UI contributions, and even city-level payroll taxes.

This guide explains how income tax works in Colorado, what employers must do to stay compliant, and how Deel’s payroll solutions can automate much of that process.

How income tax works in Colorado

Colorado administers a flat personal income tax rate of 4.40%, which applies to nearly all types of taxable income. Unlike states with progressive brackets, every taxpayer pays the same percentage on taxable income after federal adjustments.

Due to recent legislation tied to excess state revenue, the rate has been and may continue to be temporarily reduced. Other legislation (HB24-1065) was introduced to permanently reduce the rate to 4.0% starting in 2025, but state guidance indicates withholding remains at the $4.40% standard rate until an official determination is made in late 2025 regarding a temporary reduction or permanent change.

The Colorado Department of Revenue manages state income tax, withholding, and employer filings. Employers must withhold Colorado income tax from wages when both of the following are true:

• The wages are subject to federal income tax withholding, and

• The employee is either:

  • A Colorado resident (regardless of work location), or

  • A nonresident performing services in Colorado

The flat rate simplifies calculation but does not remove employer responsibility. If withholding is required, the employer is liable for remitting it, even if the amount was not withheld from the employee’s pay.

Registering for withholding

Any employer paying wages subject to Colorado withholding must register with the Colorado Department of Revenue before the first payroll.

Registration can be completed online through Revenue Online, CDOR’s business portal. Employers will receive a Colorado wage withholding account number used to file and remit state tax. Once registered, CDOR assigns a filing frequency (weekly, monthly, or quarterly) based on the employer’s anticipated annual liability.

Employers that stop paying wages subject to Colorado withholding must formally close their account to avoid unnecessary filing notices.

Calculating and withholding Colorado state income tax

Colorado’s Wage Withholding Tax Guide and Form DR 1098 provide instructions for computing withholding.

Key details include:

• Flat rate structure: The rate applies uniformly to all taxable wages. (As of 2025, CDOR’s published rate will reflect legislative adjustments under the Colorado Taxpayers’ Bill of Rights (TABOR) provisions.)

• Employee elections: Workers use the federal Form W-4 and Colorado Form DR 0004 (Employee Withholding Certificate) to declare filing status and adjustments.

• Supplemental wages: Bonuses and commissions are generally taxed at the same flat rate as regular wages.

• Taxable compensation: Includes cash wages, salaries, tips, and noncash benefits subject to federal tax.

Employers must apply the current rate to all taxable earnings and remit payments on the schedule assigned by CDOR.

Filing and remitting withheld tax

Employers must file withholding returns and pay taxes according to CDOR’s filing frequency rules:

Even if no wages were paid or no tax was withheld in a period, a return is still required.

Employers must also file an annual reconciliation using Form DR 1093, summarizing all wages and withholdings for the year, and submit copies of employee W-2s.

Late filing or non-payment may result in penalties and interest. For example: Employers who miss tax payment deadlines face penalties starting at $5 or 5% of the unpaid tax, increasing monthly up to 12%, plus a 15% collection penalty and additional fines for fraud or willful noncompliance.

Employee filing obligations

Employees must file their Colorado Individual Income Tax Return (Form DR 0104) if they meet filing thresholds or had Colorado tax withheld.

• Residents file on all taxable income

• Nonresidents file if they earned Colorado-source income

• Part-year residents file and apportion income earned during residency

Filing is due April 15, with extensions aligning with federal deadlines. Returns can be filed electronically through Revenue Online or by mail. Learn more in Colorado’s Individual Income Tax Guide.

Colorado Unemployment Insurance (UI)

Unemployment insurance is administered by the Colorado Department of Labor & Employment (CDLE) through its MyUI Employer+ system.

Registration requirements:

• New employers must register online before paying wages

• The CDLE assigns an employer account number and tax rate

• Employers are subject to UI tax on the first $27,200 of each employee’s annual wages

Contribution rates

New employers usually start with a standard unemployment insurance (UI) rate until they’ve built up enough experience to earn their own.

Once experience-rated, employers receive an annual notice detailing their rate for the coming year, which is calculated based on their claims history and the health of the state’s UI Trust Fund. Each quarter, employers report and pay their UI premiums through MyUI Employer+, along with detailed wage reports that list every employee’s earnings.

Penalties and compliance

CDLE enforces strict reporting deadlines. Reports are due on the last day of the month following each quarterly, and late submissions or underpayments result in penalties and interest.

See also: Understanding Colorado Employment and Labor Laws

Local and other employer taxes

Local taxes

In Colorado, local governments can set their own sales, use, and occupational taxes. Some cities, including Denver, Aurora, and Greenwood Village, levy an occupational privilege or “head” tax.

In Denver, for instance, employers pay a monthly tax for each employee who earns above the local threshold and works within city limits. Employers need to register directly with the city to handle collection and reporting.

While the Colorado Department of Revenue (CDOR) doesn’t administer these local taxes, its website offers general guidance and points employers to the right local tax authorities.

Corporate income tax

Corporations doing business in Colorado must also pay state corporate income tax, administered by CDOR. The tax is based on net income apportioned to Colorado using the state’s single-sales-factor formula.

Learn more about Colorado’s corporate income tax.

See also: What is Colorado FAMLI (Family and Medical Leave Insurance) in 2025?

Residency rules and filing status

Residency determines who owes Colorado income tax and how much. According to CDOR’s Individual Income Tax Guide:

• A resident is anyone domiciled in Colorado or who maintains a permanent place of residence and spends more than six months of the year in the state

• A part-year resident is taxed on all income while domiciled in Colorado and on Colorado-source income while living elsewhere

• A nonresident is taxed only on Colorado-source income, such as wages earned for work performed in the state

Filing status mirrors federal categories: single, married filing jointly or separately, and head of household. Status affects deductions, credits, and withholding accuracy.

Colorado deductions and credits

Colorado generally starts with federal taxable income and allows specific subtractions (deductions) and credits.

Common subtractions include:

• Retirement income (up to allowable limits by age)

• US government bond interest

• Certain Social Security benefits (if taxed federally)

Credits include:

• Earned Income Tax Credit (EITC): A percentage of the federal credit

• Child Tax Credit (CTC): Based on federal eligibility and income thresholds

• Enterprise Zone Credit: For businesses investing in designated areas

Employers typically do not apply these directly in payroll withholding, but employees claim them on their annual returns. However, understanding available credits helps employers answer payroll questions and advise workers to adjust their DR 0004 elections if needed.

Filing and payment details for employers

Required forms

Employers use the following key forms and systems:

• DR 1098: Withholding Worksheet for Employers

• DR 1093: Annual Withholding Reconciliation

• DR 0004: Employee Withholding Certificate

• MyUI Employer+: Quarterly wage reporting and UI contributions

All forms and filing instructions are available through Revenue Online and CDLE’s employer portal.

Recordkeeping

CDOR and CDLE both require employers to keep payroll and withholding records for at least four years. Records must include:

• Employee names, addresses, and Social Security numbers

• Dates and amounts of all payments

• Withholding amounts and filing confirmations

Maintaining detailed payroll records supports both state audits and employee inquiries.

Looking for compliance support in Colorado? Learn how using a PEO in Colorado helps streamline payroll, benefits, taxation, and more.

How Deel helps automate Colorado payroll compliance

Managing payroll and taxes in Colorado means staying current with multiple agencies, forms, and filing schedules. Deel Payroll - US simplifies this by automating:

• State income tax withholding based on CDOR rules and rates

• UI registration, wage reporting, and premium payments with CDLE

• Filing frequency tracking and automatic report generation

• Adjustments for employee moves, remote work, or multi-state employment

For companies operating across several states, Deel PEO expands compliance coverage even further. As the employer of record, Deel handles all payroll, tax, HR, and benefits obligations in every jurisdiction to ensure filings, rates, and remittances remain accurate and on time.

This automation not only reduces administrative work but also minimizes compliance risk. Deel keeps pace with state updates, including changes to Colorado’s flat tax rate and UI wage base, so your payroll always reflects current law.

To learn more about how Deel can support your US payroll operations, book a free 30-minute demo with an expert.