Establishing a Limited Liability Company (LLC) in Colorado is advantageous for business owners as it grants them flexibility, liability protection, and tax benefits.
Nonetheless, you must comprehend your tax responsibilities to avoid issues with the IRS or the Colorado Department of Revenue.
In this article, we will discuss the process of IRS tax return filing for Colorado LLC, focusing on classifying the taxes, reporting the taxes, deadlines, and other relevant details.
Federal Tax Filing Requirements for Colorado LLCs
The IRS divides LLCs into categories according to their structure, which dictates how they will be taxed at the federal level.
Single-Member LLC
Default Taxation: A single-member LLC is automatically viewed as a disregarded entity by the IRS which means that the owner will report the income for the entity on their individual tax return (Form 1040, Schedule C).
Self-Employment Tax: Owners are required to pay self-employment tax (15.3%) on net earnings as well.
Estimated Taxes: Quarterly estimated tax payments should be made using Form 1040-ES if tax liability is higher than $1,000 annually.
Multi-Member LLC
Default Taxation: A multi-member LLC is automatically categorized as a partnership for tax purposes, which requires the entity to report taxes via Form 1065 (U.S. Return of Partnership Income).
Schedule K-1: Every member will receive a Schedule K-1 through which they can report their share of the income from the LLC when filing their personal taxes.
Self-Employment Tax: All members of the LLC are answerable for self-employment tax on their earnings.
LLC that elects S-Corp or C-Corp Status
S-Corporation Election: The LLC owners can elect an S-Corp taxation by completing Form 2553. With this option, the owners can take a salary and reduce self-employment tax. The LLC must complete Form 1120S.
C-Corporation Election: The LLC also files Form 8832 to elect C-Corp tax treatment. The LLC will complete Form 1120 and will be taxed at the corporate income tax rates.
State Tax Responsibilities of Colorado LLCs
Colorado State Income Tax
- All members of the LLC in Colorado are taxed at a flat rate of 4.4% on the LLC’s taxable income.
- If the LLC is a single-member, he is supposed to report business income on his state-level tax return using Form DR 0104.
- Multi-member LLCs submit the Colorado Partnership/ LLC Return Form DR 0106.
Colorado Franchise or LLC Business Taxes
- In contrast to other states, Colorado does not charge any tax for forming a franchise to LLC.
- Colorado businesses, however, are required to pay an annual report fee: $10 to the Colorado Secretary of State to be in good standing.
Sales and Use Tax
- Sales tax must be collected and remitted by an LLC that sells goods or taxable services. The sales tax ranges from 2.9% to 11.2%, depending on where the LLC is stationed.
- Both multi-member and single-member LLCs must register a Colorado Sales Tax License with the Colorado Department of Revenue, along with the business taxes.
Employment Taxes (If Hiring Employees)
- Employers must register for state W/2 tax withholding with UI for unemployment benefits in Colorado.
- Colorado Unemployment UI Tax also pays for the Colorado Department of Labor and Employment services.
Tax deadlines for LLC Colorado businesses
- March 15: Deadline for multi-member LLCs (Form 1065) and S-Corps (Form 1120S).
- April 15: Deadline for single-member LLCs (Form 1040, Schedule C) and C-Corps (Form 1120).
- Quarterly (April 15, June 15, September 15, January 15): Estimated tax payments due for self-employed LLC owners.
- April 15: Colorado state tax return (Form DR 0104) deadline.
Penalties not paid
Fines and interest are also part of federal form 1065 submitted with the state tax for unpaid and underfiled taxes. Missing deadline taxes and wind up getting penalties through the state’s department of revenue or the internal revenue service.
- Federal Penalties: Late filing of Form 1065 or 1120-S can result in a penalty of $220 per month per member, up to 12 months.
- State Penalties: Colorado imposes a penalty of 5% of the unpaid tax per month, up to a maximum of 25%.
- Failure to Pay Estimated Taxes: Underpayment of quarterly taxes can lead to interest charges and penalties.
Failure to pay taxes on time will no doubt incur financial loss, and therefore, it’s necessary for LLC owners to file taxes on time, as well as accurately.
Tax Credits and Deductions Available for Colorado LLCs
A business’s taxable income can be lowered by taking advantage of deductions. Some of the common deductions are:
Business Expenses: Marketing, rent, utilities, and professional services.
Home Office Deductions: If the business is being operated from home, a portion of the utilities and rent may be deducted.
Vehicle Related Expenses: Specific expenses or a certain portion (mileage) of the vehicle expenses may be deducted.
Retirement Contributions: Can be made to 401(k) and SEP IRA accounts.
Health Coverage: Self-employed individuals can deduct premium payments for health coverage.
Filing Taxes as a Colorado LLC
Collect all relevant documents: Check that all bookkeeping has been done properly, as well as collecting all statements, invoices, and receipts.
Find federal tax documents: Determine whether to declare as S-Corp, C-Corp, partnership, or sole proprietorship.
Fill in Colorado state taxes: Individually file form DR 0104 or for LLC partnerships, form DR 0106.
Make payments if needed: To avoid fines, estimated taxes should be paid promptly.
Consult a tax expert: Tax professionals can help ensure that compliance is achieved while maximizing deductions.
How EasyFiling Can Assist Colorado LLC Owners in Filing Taxes
EasyFiling simplifies the entire process of tax filing, making it less taxing for Colorado LLC owners.
We have a unique approach to provide help with:
- LLC Tax Preparation Help: Assisting with both state and federal tax returns.
- Bookkeeping & Record Maintenance: Easy income and expense tracking for hassle-free tax preparation.
- Estimated Tax Payment Assistance: Providing help with payment of estimated taxes to prevent penalties.
- Sales Tax Registration and State Compliance: Assisting with filing sales tax in Colorado.
Managing the taxes for your LLC is effortless with EasyBooks by EasyFiling. Get started today at EasyFiling.us.
Conclusion
Like all other states in America, Colorado requires residents to file tax returns on a federal and state level. Doing due diligence on the tax classification of your LLC, adhering to deadlines, and having proper records will make tax season less strenuous.
For non-proficient users of accounting software, consider hiring a tax professional or using EasyFiling’s EasyBooks for more accurate tax preparation and compliance.
Frequently Asked Questions (FAQs)
1. Do Colorado LLCs have to pay an annual franchise tax?
Unlike many states, Colorado does not charge an annual franchise tax on LLCs. However, income and sales tax obligations still exist.
2. Are there any business expenses that can be deducted in my Colorado LLC tax return?
Of course, rent, supplies, travel expenses, and employee salaries are acceptable business expenses that can be deducted to minimize taxable income.
3. As a single owner of a Colorado LLC, do I still need to file an additional tax return?
No, single-member LLCs are disregarded entities by default, meaning the business income and expenses are reported in the individual tax return Form 1040 Schedule C.
4. If I don’t pay my taxes by the deadline, what are the consequences for my LLC?
Failing to meet the deadline can cause penalties from the IRS and Colorado state. The IRS has a member penalty for not filing Form 1065 on time, and Colorado tends to charge interest and late payment penalties.
5. Is there an option for a Colorado LLC to adjust its tax classification?
Of course, a Colorado LLC may choose to be classified as an S Corporation or C Corporation by filing Form 2553 and Form 8832 with the IRS.
Nabin Adhikari
