Colorado: Tax Requirements and Solutions for Common Tax Problems

If you live in Colorado, run a business in the state, or have Colorado-sourced income, you will have to pay state taxes. The state imposes an income tax on individuals and corporations, it assesses sales tax on the sale of most tangible personal property, and employers also have to deal with a myriad of taxes.

Failure to pay or file your Colorado tax returns can lead to financial penalties and collection actions as well as closure of your business. To get help with Colorado tax problems now, contact us today at 20/20 Tax Resolution.

In the meantime, this guide outlines the major tax obligations for individuals and businesses in Colorado. Then, it explains what happens if you don’t pay taxes and looks at solutions for taxpayers who’ve fallen behind on their obligations.

Overview of Colorado State Taxes

Here are the taxes you may face if you are a Colorado resident, a non-resident with Colorado-source income, or a business owner with nexus in Colorado.

Business Tax Filing Requirements

The state imposes a 4.40% corporate income tax. C-corporations must file a DR 0112 return and pay the associated tax if they are organized in Colorado or have significant nexus in the state.

Partnerships and S-corps must file a DR 0158-N. These businesses don’t pay any state income tax at the business level. Instead, they pass earnings to their partners/shareholders who must report the income on their personal income tax returns.

Need extra time? To request an extension, C Corporations should file a DR 0158-C form. Partnerships and S Corporations should use the DR 0158-N to request an extension.

If you run a sole proprietorship, you do not have to file a stand-alone Colorado income tax return for the business. Instead, you file a Schedule C (Schedule F if dealing with a farm or ranch) with your federal tax return, and then, you also file an individual income tax return with the state that shows all of your income.

Do non-profits have to file income tax returns in Colorado?

If your non-profit files IRS Form 990-T showing unrelated business taxable income from Colorado or from business activities in Colorado, then, it must file a Colorado corporate tax return.

How do you file taxes for an LLC in Colorado?

LLCs are legal entities, and the correct tax form depends on the LLC’s number of members and whether it has incorporated or elected to be taxed as an S-corp. In Colorado, unincorporated single-member LLCs simply file a Schedule C as a sole prop, while unincorporated multi-member LLCs file a 1065 partnership return. LLCs that have incorporated file a corporate state return, and LLCs that have elected to be taxed as an S-corp file that return.

Employer Taxes

If you have employees in Colorado, you must file reports and pay taxes for the following:

• Colorado withholding – You can pay and file on the Department of Revenue’s website or by filing Form DR 1094 through the mail and sending a check.
• FAMLI – The FAMLI program provides paid leave for up to 12 weeks for qualifying events such as births, adoptions, and serious health conditions. You must withhold .045% of employee wages and remit it to the FAMLI department. If you have 10 or more employees, you must match the contribution, bringing the full amount to .9% of wages.
• Colorado Unemployment – Employers must pay unemployment premiums to the Colorado Department of Labor and Employment (CDLE) based on the wages paid to their employees. The rate varies based on several factors.

Additionally, if your business has five or more employers, you must sign up for the Colorado Secure Savings program if you don’t offer an in-house retirement plan for employees. This program does not cost employers money, and the state claims that the administrative burdens are minimal. However, for a smaller employer, this requirement can be confusing and a lack of compliance can lead to fines of $100 per employee.

Sales and Use Tax

Colorado-based retailers must collect sales tax on the items they sell. The state does not apply sales tax to any services, except for telephone and telegraph services and gas and electric service for commercial consumption. You also have to collect sales tax on hotel rooms or rentals lasting less than 30 days.

If you’re based out of state but sell to Colorado customers, you must register for a sales tax account in the state, unless your Colorado sales for the current and previous years are under $100,000.

The state sales tax rate is 2.9%, but local entities can add their own sales tax. For example, as of 2025, the sales tax rate in Denver is 9.15% which includes the state tax of 2.9%, the city tax of 5.15%, a 1% tax for RTD Greater Denver, and a 0.1% Scientific & Cultural Facilities District Tax.

Sales tax returns are generally due monthly, but very small retailers may be able to file an annual sales tax return. You can file online or through the mail.

Marijuana Taxes

If you operate a retail marijuana store or a retail marijuana hospitality and sales establishment, you must assess a 15% sales tax on the marijuana products you sell. Then, you must file a return and pay taxes to the state. You must also file a traditional sales tax report.

Retail marijuana is exempt from state sales tax and some local taxes. In contrast, medical marijuana and medical marijuana products are subject to state and local sales tax, but they are not subject to the 15% tax that applies to recreational marijuana.

In addition to these state-level rules, marijuana business owners must also deal with the complexities of operating a business that is illegal on the federal level as of 2024. Whether you’re dealing with state or federal tax issues, you should strongly consider consulting with a professional who is experienced with navigating this relatively new area of the retail or medical marijuana industry.

Individual Income Tax

Colorado taxes individual income at a rate of 4.4%. Generally, if Colorado residents are required to file a federal return, they are also required to file a Colorado return. Non-residents typically need to file if they have Colorado-sourced income.

Colorado Tax Audits

The Department has the right to audit any return filed in the state. If you are selected for an audit, you will need to back up the information reported on your returns. The auditor may require you to provide sales reports, payroll reports, bank statements, and any other documents related to your tax return.

Consequences of Not Paying or Filing Colorado Tax Returns

If you do not file or pay your taxes, you will incur late penalties and interest. You may also face involuntary collection actions by the state. Here is an overview of what to expect.

Penalties for Paying and Filing Late

The Colorado Department of Revenue assesses penalties on taxpayers who file or pay their taxes late. Here are the penalties for various taxes in the state:

• Income tax – the greater of $5 or 5% of the unpaid tax and then 1/2% per month, up to 12%.
• Sales tax – the greater of $15 or 10% and then 1/2% per month, up to 18%.
• Wage withholding – the greater of $5 or 5% and then 1/2% per month, up to 12%.
• Cigarette tax – the greater of $100 or 10% and then 1/2% per month, up to 18%.
• Consumer use tax – the greater of $15 or 10% and then 1/2% per month, up to 18%.
• Fuel excise tax – the greater of $30 or 10% and then 1/2% per month, up to 18%.
• International Fuel Tax Agreement (IFTA) – the greater of $50 or 10% of the unpaid tax.
• Liquor excise tax – 10% and then 1% for each month.
• Marijuana sales and excise tax – the greater of $15 or 10% and then 1/2% per month, up to 18%.
• Nicotine products tax – the greater of $15 or 10% and then 1/2% per month, up to 18%.
• Passenger mile tax – 10% and then 1/2% per month, up to 18%. But if you file on time and pay late, the penalty drops to 3% for each month the tax is late.
• Severance tax – the greater of $30 or 30% of the tax.
• Tobacco products tax – the greater of $25 or 10% and then 1/2% per month, up to 18%.

DOR Tax Collections

If you do not pay your individual income tax or any of the state’s business-related taxes, the Department of Revenue may attempt to collect the tax involuntarily. The DOR has the right to do the following:

• File a tax lien which attaches to all of your assets.
• Refer your account to a third-party collection agency.
• Garnish your wages – usually at a rate of 25% of disposable income.
• Seize your bank accounts or other assets including vehicles and real estate.
• Take your state or IRS refund to cover the debt.

As of 2024, the DOR works with BC Services in Longmont and Integral Recoveries in Englewood for third-party collections.

Resolution Options for Colorado Taxes

If you’ve fallen behind on your tax bills or if you have not filed the required returns, you may want to explore the following solutions.

Payment Plans

The DOR may allow qualifying individuals and businesses to make payments if they cannot afford to pay their tax liabilities in full when they are due. Individuals may apply for payments online through the DOR’s website. Businesses must contact the DOR directly and speak with a Compliance Agent.

If you need extended time to pay or if you cannot afford the DOR’s suggested minimum monthly payment, you may request extended terms by filing Form DR 6596 (Statement of Economic Hardship form). You also must file this form if requested by the Department.

While you’re making payments, interest and late payment penalties will continue to accrue on your account.

Offer in Compromise

The DOR may be willing to settle individual income tax liabilities through an offer in compromise. To qualify, you must first get approval for an offer in compromise from the IRS. Then, the Department will review your situation and decide whether or not to give you a settlement on your state taxes. To qualify, you must prove that you cannot afford to pay the tax and meet the following criteria:

• Have not previously received an offer in compromise on Colorado state taxes.
• Have not received tax relief through a bankruptcy discharge, innocent spouse claim, or penalty waiver.
• Have filed all Colorado tax returns.
• Have paid all Colorado estimated tax payments.
• Not party to an open bankruptcy case.

To apply, file DR 3023 Offer in Compromise Terms and Conditions along with a hardship statement on Form DR6596. Also, provide a written explanation of why you should qualify and include copies of your IRS OIC application.

Unfortunately, businesses cannot qualify for offers in compromise in Colorado, and if you’re struggling to pay business taxes, you may want to reach out to a tax professional.

Innocent Spouse Relief

You may be able to get relief from tax due on a jointly filed return if you have gotten divorced and the tax due is related to your former spouse’s income. To qualify, you must apply for the IRS’s innocent spouse relief program. If the IRS accepts your request, the DOR will mirror their decision.

The IRS offers innocent spouse relief in a variety of situations, but the Colorado DOR website only mentions this particular scenario. Talk with a tax professional if you need relief from tax debt on a return that was filed as married filing jointly.

Injured Spouse Relief

If your tax refund was seized to pay for your spouse’s tax debt, you may request to get your portion of the refund back. To apply, you must send the state a copy of your federal income tax return or IRS Form 8379 and copies of your income documents.

Penalty Relief

The DOR may be willing to waive penalties if you show that you had reasonable cause to pay or file late. Typically, reasonable cause refers to events outside of your control such as serious illnesses or disasters. To apply for penalty relief, you must contact the Department directly or go through the DOR’s protest process as outlined in the following section.

Protest Rights and Process

If you receive a penalty, a Notice of Deficiency, or a Rejection of Refund Claim, you may protest. The notice you receive about the matter should outline which documents you need to protest. If not, file your protest and include any documents that substantiate your claims.

The protest should include a cover letter that outlines the tax period, the type of tax, and a list of items you disagree with. The Tax Conferee Section of the Department will review your claim through an informal conference. About 95% of issues are resolved at this point, but if needed, you can have your case forwarded to the Executive Director for a formal hearing.

Voluntary Disclosure Program

If you have not filed the required state returns, you may want to look into Colorado’s Voluntary Disclosure Program. This program allows you to file delinquent returns, with a limited lookback period. For income tax and sales tax, the lookback period is generally four and three years respectively, but the Department may require a different time period depending on the nature of the business’s activities and the tax liabilities that were unreported.

The DOR may waive the penalties on a case-by-case basis, but the Department cannot waive the interest. If the Department approves your application, you have 60 days to accept the offer, or you must restart the process. If you have unfiled sales tax returns in Colorado and other states, you may be able to make a disclosure to the Multistate Tax Commission rather than to the DOR.

How a Tax Professional Can Help

A tax professional can represent you in front of the DOR. They can help you identify the best resolution for your specific tax concern, and they also help with the following:

• Releasing tax liens.
• Stopping tax levies and wage garnishments.
• Protecting your business from closure.
• Representing you in state tax audits.
• Appealing DOR decisions.

When choosing a tax pro to help you, look for someone who focuses on resolution work. Tax relief is a very particular sector of the tax industry, and you need an experienced pro to help you. Also, insist on a tax pro who has experience with state tax problems in particular.

At 20/20 Tax Resolution, we are a team of tax consultants based in Colorado, but we provide nationwide representation to individual and business taxpayers. To learn more and to get help now, contact us today.