How Your Corporation Will Be Taxed
In this guide, you'll learn about the main types of tax in Colorado that apply to corporations, including sales, self-employment, corporate and federal taxes.
How your corporation is taxed will depend on whether it's an S Corp or a C Corp.
Colorado State Tax
There are two types of Colorado tax you must pay to the CO Department of Revenue: income and sales. Depending on how your business is set up, you may also need to pay use tax.
Important: All of these taxes apply whether you have a C Corp or an S Corp.
Colorado Income Tax
Anyone who takes earnings out of your corporation will need to pay CO income tax and will be taxed at the state's standard rates. Any employees will also need to pay state income tax. The state of Colorado currently operates on a flat rate income tax of 4.55 percent.
Any taxable income will be taxed at that rate and is payable to the CO Department of Revenue, Taxation Division.
Colorado Corporate Income Tax
The state of Colorado imposes a tax on the net income of any C Corporation that is doing business in the state. The tax applies to every C corporation that is organized or commercially domiciled in Colorado and to every C corporation that has property, payroll, or sales in Colorado in excess of certain thresholds.
Just like the individual income tax rate, the corporate income tax is taxed at a flat rate of 4.55 percent. However, under certain circumstances involving fiscal year state revenues in excess of limitations established in the state constitution, the income tax rate for future tax years may be temporarily reduced to 4.5 percent.
Colorado Sales and Use Tax
These tax types are similar enough that they're often categorized together. It's still important to understand the differences between them.
Federal Taxes for Corporations
Federal taxes can be complicated, so speak to your accountant or professional tax preparer to ensure that your Colorado corporation is paying the correct amount, and that you're paying the correct individual amount.
Federal Taxes for C Corps
All shareholders who earn wages or a salary from a C Corporation must pay self-employment tax. This tax is administered by the Federal Insurance Contributions Act (FICA) and covers Social Security, Medicare and other benefits. The current self-employment tax rate is 15.3 percent.
You’ll be able to deduct some of your business expenses from your income when calculating how much self-employment tax you owe.
Federal Taxes for S Corps
The Internal Revenue Service may allow your business to be treated as an S Corporation for tax filing purposes, provided it meets certain requirements. This can help you reduce the amount of self-employment tax you pay by allowing you to declare some of your income as salary (on which you'll pay self-employment tax) and other income as distributions (which are not subject to self-employment tax).
Speak to your accountant or professional tax preparer for more information on reducing your tax burden through an S Corporation tax election.
A C Corporation may pay shareholders dividends as a share of the profits of the company. The value of dividends to which each shareholder is entitled depends on how many shares they own.
Dividends distributed to shareholders are taxed twice — first at the corporate level as profit (on the corporation’s Form 1120, the U.S. Corporation Income Tax Return) and again at the individual level as stock dividends (on the shareholder's Form 1040, the U.S. Individual Income Tax Return).
Employee and Employer Taxes
If you pay employees, there are some slightly different tax implications. Speak to your accountant to get clear guidance for your unique situation.
Other Taxes and Duties
Depending on your industry, you may be liable for certain other taxes and duties. For example, if you sell gasoline, you may need to pay a tax on any fuel you sell. Likewise, if you import or export goods, you may need to pay certain duties.
Speak to your accountant about any other taxes or duties you may need to withhold or pay.
It's a little less straightforward for an S Corp, which will pay estimated taxes by filing an IRS Form 1120-S, which is the income tax return form for S Corps.
Also, as the owner of an S Corp, you'll need to make estimated payments on self-employment tax.