How Colorado Taxes LLCs in 2025
Colorado offers a relatively straightforward and business-friendly LLC tax environment. The state imposes a flat 4.4% income tax rate on all taxable income, regardless of the amount earned. This flat-rate system, reduced from 4.55% in prior years, simplifies tax calculations considerably for LLC owners.
Colorado does not impose any entity-level tax, franchise tax, or special LLC fee on pass-through LLCs. Income flows through to members' personal returns and is taxed at the flat 4.4% rate. The state uses federal taxable income as the starting point for state calculations, making compliance easier.
Key Benefit: Colorado requires only a $10 periodic report fee (due annually) and imposes no franchise tax or entity-level tax. Combined with the flat 4.4% rate, Colorado is one of the most cost-effective states for LLC operations.
Colorado's Flat Tax Rate
Colorado's flat income tax rate applies uniformly to all taxable income:
| Filing Status | Tax Rate | Starting Point |
|---|---|---|
| Single | 4.4% | Federal taxable income |
| Married Filing Jointly | 4.4% | Federal taxable income |
| Married Filing Separately | 4.4% | Federal taxable income |
| Head of Household | 4.4% | Federal taxable income |
Colorado uses federal taxable income as the starting point, then applies state-specific additions and subtractions to arrive at Colorado taxable income. This means your federal standard deduction or itemized deductions are already reflected.
Colorado LLC Annual Requirements
- Periodic Report: $10 per year, filed with the Colorado Secretary of State
- Due date: During the anniversary month of LLC formation
- No franchise tax: Colorado does not impose a franchise tax on LLCs
- No entity-level tax: Pass-through LLCs pay no separate state entity tax
- Late filing penalty: $50 penalty if the periodic report is not filed on time
Federal Taxes for Colorado LLCs
- Self-Employment Tax: 15.3% (12.4% Social Security on income up to $176,100 and 2.9% Medicare on all income, plus 0.9% Additional Medicare Tax above $200,000/$250,000)
- Federal Income Tax: 10% to 37% based on filing status and total taxable income
- QBI Deduction: Up to 20% of qualified business income under Section 199A
Tax Comparison: A Colorado LLC owner earning $100,000 pays approximately $3,872 in state income tax. Compare this to California's ~$6,000-$8,000 (plus $800 franchise tax) or New York's ~$5,000-$6,500 for the same income level.
Colorado Sales Tax
Colorado has one of the most complex sales tax systems in the nation due to its "home rule" municipalities:
- State sales tax: 2.9%
- County taxes: Up to 2% additional
- City/municipal taxes: Up to 8.3% additional
- Special district taxes: Additional levies in some areas
- Average combined rate: 7.78%
- Denver combined rate: 8.81%
- Home rule cities: Administer their own sales tax separately (about 70 cities)
Important: Home rule cities in Colorado require separate sales tax registration, filing, and payment directly to the city, not through the state. This makes compliance more complex for businesses operating across multiple jurisdictions.
Colorado LLC Formation Costs
- Articles of Organization: $50 (online filing)
- Periodic Report: $10 per year
- Registered Agent: Required; can be a member or commercial service ($50-$300/year)
- Trade name registration (optional): $20
Colorado Pass-Through Entity Tax (PTET)
Colorado enacted a PTET election that allows LLCs to pay state income tax at the entity level as a SALT cap workaround:
- The tax is imposed at 4.4% on the entity's taxable income
- Members receive a corresponding credit on individual returns
- The election is made annually on a timely filed composite return
- Estimated payments may be required
- Effective for tax years beginning on or after January 1, 2022
Colorado Employment Taxes
- Unemployment Insurance (UI): 0.75% to 10.39% on the first $23,800 of wages per employee (new employer rate: 1.7%)
- FAMLI (Paid Family and Medical Leave): 0.9% of wages split between employer and employee
- Workers' Compensation: Required for most employers; rates vary by classification
Colorado LLC vs. Other Flat-Tax States
| State | Flat Tax Rate | Sales Tax | LLC Annual Fee | Filing Fee |
|---|---|---|---|---|
| Colorado | 4.4% | 2.9% + local | $10 | $50 |
| Arizona | 2.5% | 5.6% + local | $0 | $50 |
| Illinois | 4.95% | 6.25% | $75 | $150 |
| Indiana | 3.05% | 7% | $30 biennial | $95 |
| Michigan | 4.25% | 6% | $25 | $50 |
| Utah | 4.65% | 6.1% | $20 | $54 |
| North Carolina | 4.5% | 4.75% | $200 | $125 |
Filing Deadlines for Colorado LLCs
- Colorado individual return (Form DR 0104): April 15
- Partnership return (Form DR 0106): March 15 for multi-member LLCs
- Periodic Report: During the anniversary month of formation
- Extension: Automatic 6-month extension with federal extension
- Estimated tax payments: April 15, June 15, September 15, January 15
- Sales tax: Monthly or quarterly depending on volume
Common Mistakes Colorado LLC Owners Make
- Missing the periodic report: The $10 report is easy to forget but failure to file results in a $50 penalty and potential administrative dissolution.
- Not registering for home rule city taxes: If you sell in Denver, Colorado Springs, Aurora, or other home rule cities, you need separate registrations.
- Overlooking the FAMLI requirement: Colorado's Paid Family and Medical Leave Insurance applies to most employers and is often overlooked by new LLCs.
- Not utilizing the PTET election: If you itemize federal deductions, the pass-through entity tax election can save significant money.
- Confusing state and local sales tax systems: Colorado's multi-layered sales tax structure requires careful attention to where you conduct business.
Tax Planning Tips for Colorado LLC Owners
- Maximize retirement contributions: SEP IRA ($69,000 limit) or Solo 401(k) to reduce both federal and state taxable income
- Health insurance deduction: Self-employed health insurance premiums reduce AGI
- QBI Deduction: Take advantage of the 20% qualified business income deduction
- PTET Election: Consider the pass-through entity tax election if affected by SALT cap
- Colorado subtractions: Colorado offers various state-specific subtractions from federal taxable income
- Timing strategies: Manage income and deductions to optimize your flat-rate tax liability