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Colorado Taxes: What You Need to Know

Federal Tax withholding 

Federal tax withholding in Colorado works the same way as it does in other states, as it’s a federal requirement rather than a state-specific one. Here’s a brief overview: 

1. Federal income tax is withheld from employees’ paychecks based on information they provide on their W-4 forms. 
2. The amount withheld depends on factors like: 
   • Employee’s filing status
   • Number of dependents
   • Additional withholding amounts requested
   • Income level
3. Employers use IRS tax tables or payroll software to calculate the correct withholding amount. 
4. This withheld money is sent to the IRS, typically on a monthly or semi-weekly basis, depending on the employer’s size. 
5. At the end of the year, employers provide employees with W-2 forms showing total wages and the amount of federal tax withheld.

It’s important to note that while the process is the same across states, Colorado employees may need to consider both federal and state tax withholdings when filling out their W-4 forms. 

State and Local Tax withholding 

 Colorado employs a straightforward 4.40% flat rate for both individual and corporate income taxes. Some local jurisdictions impose additional income taxes. The state sales tax is set at 2.90%, but when combined with local taxes, the average rate reaches 7.81%. Property owners face an effective tax rate of 0.45% on their home’s value. 

The state doesn’t levy estate or inheritance taxes. Motorists pay a gas tax of 29 cents per gallon, while smokers are subject to a $1.94 cigarette tax. On average, each Colorado resident contributes $6,387 in state and local taxes. The state carries $11,972 in debt per capita and has funded 71% of its public pension obligations. 

In the 2024 State Business Tax Climate Index, Colorado’s overall tax system ranks 27th nationally. 

  Income Tax 

• Colorado employs a flat income tax rate of 4.4% for both individuals and corporations.
• This tax applies to all income for Colorado residents.
• Non-residents pay this tax only on income sourced from Colorado.

 Sales Tax 

• The state of Colorado imposes a base sales tax rate of 2.9%.
• Local jurisdictions can add their own sales taxes, which vary by location.
• In some areas, the combined state and local sales tax rate can exceed 8%.

 Property Tax 

• Colorado’s property taxes are among the lowest in the United States.
• The current residential property assessment rate is 6.95% of the property’s actual value.
• Property tax rates can vary significantly depending on the specific county, city, or school district.

 Specific Taxes 

• Colorado levies a gasoline tax of 22 cents per gallon.
• Taxes on a pack of cigarettes increased in July 2021 to $1.94 from 84 cents. On July 1, 2024, the tax will increase to $2.24 a pack and then rise to $2.64 in July 2027.
• Marijuana is subject to a 15% excise tax and an additional 15% sales tax for recreational use.

 Tax Filing 

• Colorado residents are required to file their state tax returns using Form 104 on an annual basis.
• Taxpayers may need to make regular withholdings or estimated tax payments throughout the year.

 FICA & State Insurance Taxes in Colorado 

 Social Security Tax 

• The Social Security tax rate is 6.2% of an employee’s wages up to the wage base limit.
• In 2023, the wage base limit for Social Security tax is $160,200.
• Both employers and employees contribute 6.2%, totaling a 12.4% contribution.

 Medicare Tax 

• The Medicare tax rate is 1.45% of an employee’s wages with no wage base limit.
• Employees earning over $200,000 (single) or $250,000 (joint) pay an additional 0.9% Medicare tax on excess wages.
• Employers match the 1.45% but not the additional 0.9%, resulting in a total contribution of 2.9% for most employees.

 Colorado State Insurance Taxes 

 Unemployment Insurance (UI) Tax 

• Employers in Colorado pay UI tax to fund unemployment benefits for displaced workers.
• UI tax rates for employers typically range from 0.20% to 5.40%.
• The 2023 taxable wage base for UI in Colorado is $20,400 per employee.

 Workers’ Compensation Insurance 

• Most Colorado employers must carry workers’ compensation insurance to cover work-related injuries.
• Employers pay the full premium for workers’ compensation, which is not deducted from employee wages.
• Insurance rates depend on the employer’s industry, payroll, and claims history.

 State Disability Insurance 

• Colorado does not have a mandatory state disability insurance program.
• Employers may offer private disability insurance, but it’s not required by state law.

Pre-Tax deductions (Medical Insurance, 401K etc.,) 

Common Pre-Tax Deductions 

• Medical Insurance: Premiums for employer-sponsored health, dental, and vision plans are typically deducted pre-tax.
• Health Savings Accounts (HSAs): Contributions are pre-tax. The HSA contribution limits for 2024 are $4,150 for self-only coverage and $8,300 for family coverage. Those 55 and older can contribute an additional $1,000 as a catch-up contribution.
• Flexible Spending Accounts (FSAs): Healthcare FSAs allow up to $3,200 annually.
• Retirement Plans: 401(k), 403(b), and 457 plans allow pre-tax contributions up to $22,500 annually ($30,000 for those 50 or older).
• Commuter Benefits: Up to $300 monthly for parking and $300 for public transit or vanpooling.
• Group-Term Life Insurance: Employer-provided coverage up to $50,000 is usually pre-tax.
• Dependent Care Assistance Program (DCAP): Allows up to $5,000 annually for dependent care expenses.

 Tax Benefits 

• Pre-tax deductions reduce taxable income for federal, Colorado state (4.4% flat rate), and often FICA taxes.
• This results in lower overall tax liability and increased take-home pay for employees.

Median household income in Colorado

According to the latest estimates from the U.S. Census Bureau, Colorado’s typical household earns around $84,400 annually, based on 2022 data.
 

Colorado Tax Brackets 2024

For 2024, Colorado has a flat income tax rate system. This means that all taxpayers, regardless of their income level, are taxed at the same rate. Here’s the comprehensive breakdown: 

2024 Colorado Income Tax Rates: 

Additional Notes: 

• Colorado switched from a higher flat tax rate to 4.40% in recent years. 

• This flat rate applies to all income levels, meaning whether you earn $10,000 or $1,000,000, you’ll be taxed at 4.40% of your taxable income. 

Since the state does not have progressive tax brackets, this rate applies uniformly to all taxpayers. Be sure to consult with a tax professional for other deductions, credits, or changes that may apply to specific situations in 2024.