How Your LLC Will Be Taxed
In this guide, we’ll cover the main business taxes required in Colorado, including payroll, self-employment and federal taxes. The profits of an LLC aren’t taxed at the business level like C Corporations. Instead, taxes are as follows:
State Taxes for LLCs
There are two main types of state tax you might have to pay to your state Department of Revenue: Colorado state income tax and sales tax.
Colorado Income Tax
As a business owner, you’ll need to pay Colorado income tax on any money you pay to yourself. These earnings flow through to your personal tax return. You’ll be taxed at Colorado's standard rates, and you’ll also be able to apply regular allowances and deductions.
Any employees will also need to pay state income tax. The Colorado single income tax rate for tax years 2018 and prior was 4.63 percent, tax year 2019 was 4.5 percent and tax year 2020 is 4.55 percent. 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
If you sell physical products or certain types of services, you may need to collect sales tax and then pay it to the Colorado Department of Revenue. Colorado's sales tax is collected at the point of purchase. The listed sales tax rate for the State of Colorado is currently at 2.9 percent, but certain counties, cities and municipalities may levy an additional sales tax, resulting in a combined sales tax of up to 11.2 percent.
Most states do not levy sales tax on goods that are considered necessities, like food, medications, clothing or gas. Check with the Colorado Department of Revenue to confirm whether your business is required to collect Colorado sales and use tax.
Federal Taxes for LLCs
As the owner of an LLC, you must pay self-employment tax and federal income tax, both of which are levied as “pass-through taxation."
Federal taxes can be complicated, so speak to your accountant or professional tax preparer to ensure that your Colorado LLC is paying the correct amount.
Federal Self-Employment Tax
All members or managers who take profits out of the LLC 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.
Pay Less Self-Employment Tax by Treating Your LLC as an S Corporation
The Internal Revenue Service allows an LLC to be treated as an S Corporation for tax purposes, provided your business 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 and other income as distributions or withdrawals.
Speak to your accountant or professional tax preparer for more information on reducing your LLC self-employment tax through an S Corporation tax election.
You can do this by making an “S Corporation Tax Election” with the IRS using Form 2553. We can file your Form 2553 with the IRS on your behalf.
Federal Income Tax
You must also pay regular federal income tax on any earnings you take out of your Colorado LLC. The amount of income tax you pay depends on your earnings, current income tax bracket, deductions and filing status.
You only pay federal income tax on profits you take out of the business, less certain deductions and allowances. This includes your tax-free amount, plus business expenses and other deductions for areas such as healthcare and some retirement plans.
Speak to your accountant for more information.
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.
Employer Payroll Tax Withholding
All employers are required to withhold federal taxes from their employees’ wages. You’ll withhold 7.65 percent of their taxable wages, and your employees will also be responsible for 7.65 percent, adding up to the current federal tax rate of 15.3 percent.
Speak to your accountant for more information.
Employees May Need to File Tax Returns
Regardless of whether you withhold federal and state income tax, your employees may need to file their own tax returns.
Employee Insurance and Other Requirements
You may also need to pay insurance for any employees, such as employee compensation insurance or unemployment tax.
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.
Most LLCs must pay estimated taxes throughout the year, depending on the amount of profit and income you expect to make. The most common types of estimated tax are: