Operational Gaze:
How to Run Payroll in Colorado?

January 19th 2024

Colorado tax laws include a wide range of regulations governing taxation within the state of Colorado. Employers in Colorado are faced with the task of managing payroll in Colorado involves the complete process of compensating employees, which includes calculating earnings, deductions, and complying with local payroll tax regulations. Understanding Colorado’s unique labor laws and tax regulations is crucial for efficient payroll management.

A detailed, step-by-step guide tailored to Colorado’s payroll requirements is provided to assist businesses in navigating each pay cycle accurately. Payroll management goes beyond issuing paychecks; it’s about taking care of your workforce and adhering to complex regulations, making it challenging, especially for new businesses.

The guide aims to simplify the payroll process by offering insights and instructions for businesses in Colorado, ensuring smooth and compliant payroll operations, regardless of their level of experience.

This Article Covers

Laws That Affect Payroll Procedures in Colorado
Worker Classifications in Colorado
Payroll Forms and Relevant Bodies in Colorado
Applicable Taxes in Colorado
Key Pay Elements That Impact Payroll in Colorado
Step-by-Step Guide to Payroll in Colorado

Laws That Affect Payroll Procedures in Colorado

Colorado Laws

  • Colorado Labor Code: The Colorado Labor Code deals with wages, sick leave, and workers’ compensation. It’s important to note that Colorado’s laws also refer to federal statutes like the Federal Labor Standards Act (FLSA) for certain rules.
  • Minimum Wage: Colorado’s minimum wage is currently set at $14.42 per hour and increases over time. Employers in Colorado are required to pay their employees at least this amount.
  • Overtime Pay: In Colorado, employees are entitled to extra pay when they work more than 40 hours in a week. This extra pay is usually one and a half times their regular wage.
  • Paid Sick Leave: Colorado labor laws require certain employers to provide paid sick leave to their employees. The amount of sick leave an employee can accumulate and the conditions for using it depend on the employer’s size and other factors. Employers must inform their employees about these rights.
  • Family and Medical Leave: Colorado also has rules about family and medical leave. Eligible employees can take up to 12 weeks of unpaid, job-protected leave for specific family and medical reasons, such as having a child or dealing with a serious health issue.
  • Workers’ Compensation: Colorado law mandates that most employers must have workers’ compensation insurance. This insurance covers medical expenses and a portion of lost wages for employees who suffer work-related injuries or illnesses.
  • Wage Payment and Record-Keeping: Colorado employers must provide regular pay statements to employees that include detailed information about their pay, deductions, and other important details. Keeping accurate records of wages and hours is essential to follow state and federal labor laws.
  • Final Paychecks: When an employee leaves their job, either by choice or involuntarily, they have the right to receive their final paycheck promptly. Colorado law specifies the timing and content of these final paychecks.

Federal Laws

  • Fair Labor Standards Act: The FLSA is an essential federal law that sets laws on  hourly wages and overtime pay. It also outlines regulations on child labor, employee classification, and the recordkeeping of employee work hours.
  • Family and Medical Leave Act: The FMLA regulates laws for leave. It allows eligible employees to take up to 12 weeks of unpaid leave for reasons like childbirth, adoption, or caring for a family member with a serious health condition.
  • Federal Insurance Contributions Act (FICA) Tax: Both employers and their employees are required to pay FICA taxes. For Social Security taxes, both businesses and workers contribute 6.2 percent of their earnings up to $132,900. Additionally, the Medicare tax rate is 1.45 percent of a business’s and a worker’s yearly income. These rates may change annually according to IRS guidelines, so it’s essential to keep track of them.

HR Laws

New Hire Reporting: In Colorado, employers are obligated to promptly report the hiring, recalling, or rehiring of new employees to the relevant department within a seven-day timeframe. This report should include essential information about each newly hired, recalled, or rehired individual, such as their full name, address, social security number, and date of employment. Additionally, employers must provide their own details, including their name, address, and both state and federal identification numbers.

Posting Requirements: The State of Colorado, employers are obligated to have labor law posters displayed in the workplace. These posters cover critical topics such as minimum wage regulations, health and safety guidelines, and other significant labor laws. This ensures that employees are informed about their rights and responsibilities under Colorado labor laws.

Worker Classifications in Colorado

Employees and Independent Contractors

Misclassification happens when an employer mistakenly categorizes a worker as an “independent contractor” instead of an employee. It’s a mistake that can occur by accident but is sometimes done to avoid legal obligations. Knowing and correctly applying employee classifications is important for both employers and workers in Colorado. This classification has a big impact on how payroll is managed and affects the rights, benefits, and legal protections given to employees.

In Colorado, if someone is classified as an employee, their earnings are subject to state unemployment taxes, which could make them eligible for unemployment benefits. On the other hand, if they’re labeled as an independent contractor, the employer doesn’t have to pay state unemployment taxes on their income.

If you want to know more about the rights of salaried and hourly employees, you can read our guides on your rights as a salaried employee in Colorado, and your rights as an hourly employee in Colorado.

The ABC Test

Colorado uses the ABC Test to determine employment status. This test applies three factors, being A,B, and C to determine classification. To be called an “independent contractor” in Colorado, a person must meet all three of these criteria:

  1. The person must be able to work independently without being closely directed or controlled, as written in their contract and in practice.
  2. The work they do must be different from the usual business of the employer or done outside the employer’s places of business.
  3. The person must usually be working in a similar trade, profession, or business as the service they provide.

It’s important to note that, for factor A, even if the employer has the right to control the work but doesn’t use that right, it won’t meet the requirement. Also, if someone starts a business only in response to a job offer as an independent contractor, they might not meet the criteria in test C for being independently established.

Payroll Forms and Relevant Bodies in Colorado

Effectively handling payroll in Colorado means following several state and federal rules, which often include filling out necessary payroll forms. Here, we’ll have a look at the important payroll forms and the relevant authorities in Colorado.

Colorado Payroll Forms

  • CR 0100 – Application for Sales Tax and Withholding Account: This form is utilized by businesses to request a Sales Tax and Withholding Account from the Colorado Department of Revenue. It enables them to collect and remit state sales tax and report taxes withheld from employees.
  • DR 1094 – Colorado W-2 Wage Withholding Tax Return: Employers complete this form to report the state income tax taken from their employees’ wages. It ensures compliance with state income tax withholding requirements.
  • DR 1098 – Colorado Withholding Worksheet for Employers (Withholding Worksheet Calculator): This is a tool provided by the Colorado Department of Revenue to assist employers in accurately calculating the state income tax to be withheld from employees’ paychecks. It aids in precise state tax withholding.
  • DR 1107 – Colorado 1099 Income Withholding Tax Return: This form is used to report the state income tax withheld from payments to non-employees. It helps fulfill state tax withholding obligations.

Federal Payroll Forms

  • W-4 Form: This form allows employers to determine the correct tax withholding for their employees.
  • W-2 Form: Displays the total yearly earnings of each employee.
  • W-3 Form: Summarizes the combined pay and taxes for all employees.
  • Form 940: Reports owed unemployment taxes to the IRS.
  • Form 941: This form is used to report income and FICA tax deductions from paychecks on a quarterly basis.
  • Form 944: Reports annual income and FICA taxes withheld from paychecks.
  • 1099 Forms: Provide contractors with the necessary information to calculate the taxes they owe the IRS based on their earnings.

Federal and Colorado Payroll/ Tax Bodies

  • Internal Revenue Service (IRS): The IRS serves as the principal federal agency tasked with the collection of a variety of federal taxes, encompassing income, payroll, and excise taxes. Additionally, it issues directives and regulations pertaining to federal tax and payroll obligations.
  • Social Security Administration (SSA): The SSA is the authority responsible for the Social Security program, which includes the collection of payroll taxes for Social Security and Medicare. Employers are responsible for reporting and forwarding these taxes to the SSA on behalf of their employees.
  • Colorado Department of Revenue: The Colorado Department of Revenue department takes charge of state tax-related affairs, such as income tax, sales tax, and other tax-related issues in Colorado. It offers guidance, manages tax collection, and enforces state tax laws.
  • Colorado Department of Labor and Employment (CDLE): The CDLE entity is responsible for the administration of labor laws and regulations within Colorado. It oversees matters like minimum wage laws, wage and hour regulations, and workers’ compensation concerns.
  • Colorado Division of Workers’ Compensation (DWC): The DWC has the responsibility of overseeing issues related to workers’ compensation. This division guarantees that employees experiencing work-related injuries or illnesses receive the requisite benefits.

Applicable Taxes in Colorado

Employer Contributions

Federal Unemployment Tax Act (FUTA): Colorado is in compliance with the Federal Unemployment Tax Act (FUTA) which currently sets a standard federal rate, currently 6.0% on the first $7,000 of each employee’s wages.

Withheld from Employee’s Wages

  • Colorado Income Taxes: Colorado’s income tax system is progressive, with rates ranging from 4.55% for the highest income bracket to lower rates for lower incomes.
  • Workers’ Compensation in Colorado: Employers in Colorado must provide workers’ compensation insurance, regardless of the number of hours worked by their employees. The associated cost varies based on the nature of the work and other factors.
  • Social Security (FICA) Withholding: In Colorado, Social Security withholding follows federal guidelines. It constitutes a 6.2% deduction on income up to a maximum taxable limit, which stands at $137,700 in the provided information. Medicare withholding, specifically for the Hospital Insurance portion, amounts to an additional 1.45% on all income.

Additional Relevant Subtractions to Withhold on Behalf of Employees

In Colorado, it’s acceptable to make deductions from employee wages in certain situations. These include deductions required by the law, like taxes and garnishments, as well as deductions that employees agree to in writing, such as repayments for loans or equipment expenses. Additionally, deductions can be made to cover losses due to theft, but this typically has to meet specific criteria. Authorized deductions that employees can revoke, such as those for insurance or savings plans, are also allowed. Union dues and deductions to recover money or property owed to the employer are permissible as well.

When it comes to wage garnishments, which are legal orders to collect certain debts from an employee’s wages. There are several types of permissible wage garnishments:

  • Child Support: Wage garnishments for child support are permitted by federal and state laws. Employers are required to withhold and remit a certain portion of an employee’s wages to cover child support obligations.
  • Spousal Support or Alimony: Similar to child support, spousal support or alimony garnishments are typically permitted under both federal and state laws.
  • Tax Debts: Wage garnishments for unpaid federal and state taxes are allowed. The IRS and state tax agencies can issue wage garnishment orders to collect overdue taxes.
  • Creditor Garnishments: Private creditors, such as credit card companies and medical providers, can obtain judgments and, in some cases, wage garnishment orders through the courts to collect unpaid debts. However, these garnishments are subject to limits and restrictions.

Key Pay Elements That Impact Payroll in Colorado

Minimum Wage

In Colorado, the minimum wage is determined by the state and is enforced by the Colorado Overtime and Minimum Pay Standards Order (COMPS). Starting January 1, 2024, the minimum wage in Colorado for non-exempt employees) is $14.42 per hour.

Overtime

Colorado overtime laws stipulate that when a qualifying employee has worked over 40 hours of work within a week or 12 hours within a single workday, regardless of whether these hours are continuous, they are entitled to receive compensation at a rate 1.5 times higher than their usual pay.

Workers’ Compensation Insurance

In Colorado, workers’ compensation insurance plays a vital role in ensuring that workers who sustain job-related injuries receive essential medical and wage replacement benefits. This insurance is mandatory for all businesses in the state, irrespective of the number of employees, their employment status, or even familial relationships among employees. The insurance serves as a crucial safety net for employees, guaranteeing support in case of work-related injuries while placing responsibility on employers to maintain a safe and compliant work environment.

Payment method

Colorado employers have the flexibility to use various payment methods to pay their employees. These methods include checks, cash, paycards, or direct deposit into the employee’s financial institution account.

Pay Stub Laws

Colorado law mandates that employers provide employees with an itemized pay statement, which must be given either once a month or at the time of wage or compensation payment. This statement should include details such as the gross wages earned for that specific pay period, all withholdings and deductions, net wages earned, the pay period’s inclusive dates, the employee’s name or social security number, and the employer’s name and address.

Colorado Payday and Minimum Pay Frequency

Colorado employers must stipulate when and where employees will receive their pay. Any alterations to paydays or payment details should also be made known. If there’s no mutual agreement, the law sets a standard pay period of one calendar month or thirty days, whichever is longer. Paychecks must be issued within ten days after the end of each pay period. However, certain compensation arrangements, such as profit-sharing and pension plans, have different rules. The Division of Labor Standards and Statistics insists that any changes to pay periods and payday dates must adhere to the prescribed timeframes or be mutually agreed upon by both the employer and employee.

Paycheck Deduction

Colorado permits a specific set of deductions from employee wages, which can be categorized as follows:

  • Mandatory Deductions: These are deductions required by local, state, or federal laws, such as taxes, social security, garnishments, or any court-ordered deductions.
  • Agreed Deductions: Deductions agreed upon in writing between the employer and employee, covering loans, pay advances, goods, services, or equipment. These agreements must comply with local and federal law.
  • Theft-Related Shortages: When theft is suspected, deductions can be made if specific criteria are met. This involves reporting to law enforcement, and if the accused employee isn’t charged within 90 days, found not guilty, or charges are dismissed, they can recover wrongfully withheld amounts with interest.
  • Employee-Authorized and Revocable Deductions: These are deductions authorized by the employee, which they can change or revoke as they see fit. Examples include insurance, savings, stock purchases, pension plans, charities, and deposits.
  • Union Dues Deductions: Deductions for union dues, established through a written agreement between the employer and employee.
  • Deductions for Unpaid Money or Property: In cases where a terminated employee handled money or property, deductions can be made to cover what the employee failed to pay or return. Employers have ten days after termination to review accounts and property values before paying the employee.

Final Paycheck

When an employer ends an employee’s job, any unpaid wages should be given immediately. However, there are exceptions:

  1. If the employer’s payroll department isn’t open, payment should be available within six hours of their next workday.
  2. If the payroll department is off-site, the employer should provide payment within 24 hours of their next workday. It can be delivered to the work site, the employer’s office, or the employee’s last-known address.

Mailing wages is allowed if the wages are postmarked within the specified timeframes. For example, if the payroll department is off-site, wages can be mailed with a postmark no later than 24 hours after the start of their next workday. 

Step-by-Step Guide to Payroll in Colorado

As you now know, there are specific laws that apply to Colorado regarding taxes. In this section we’ll break down the payroll process into clear, actionable steps.

  1. Identify Payroll Rules Applicable to Your Company: Before initiating payroll procedures in Colorado, it’s crucial to comprehend the specific payroll regulations that pertain to your company. These rules may differ based on factors like your industry, the number of employees you have, and whether they are paid hourly or on a salary basis. It’s essential to familiarize yourself with Colorado labor laws and federal payroll regulations, among other factors that impact payroll practices in the state.
  2. Obtain an Employer Identification Number (EIN): An Employer Identification Number (EIN) is a unique identifier issued by the IRS for tax-related purposes. To fulfill employment tax and other business tax obligations in Colorado, you’ll require an EIN. You can easily apply for an EIN online through the IRS website. This unique number is essential for tax reporting and identification purposes.
  3. Register with the Colorado Department of Labor and Employment: Colorado employers must register with the Colorado Department of Labor and Employment (CDLE) for unemployment insurance purposes. This is essential for reporting and paying unemployment taxes to the state. Registration can typically be done online through the CDLE’s website.
  4. Employee Classification: It is crucial in Colorado to correctly determine whether your workers are employees or independent contractors as this decision has significant implications for tax and wage reporting. Incorrect classification can lead to legal consequences. Colorado relies on the Common Law Test to make this determination.
  5. Collect Employee Payroll Paperwork: In Colorado, you must gather important payroll documents from your employees, including W-4 Forms for federal income tax withholding and I-9 Forms for employment eligibility verification.
  6. Track Time and Attendance: Precise record-keeping of employee work hours, breaks, overtime, and leave is a vital aspect of accurate payroll management. Colorado’s specific regulations on overtime pay and minimum wage rates must be followed, making accurate record-keeping all the more important. Employers could benefit from using tools like timesheet apps and leave trackers.
  7. Establish a Payroll Cycle: Setting up a regular payroll cycle is required in Colorado to comply with the Colorado Wage Act. The frequency of payroll may vary, but it should be consistent and communicated clearly to employees to inform them about their pay schedule.
  8. Compute Gross Earnings: Accurately calculating gross earnings is essential in Colorado, where specific wage and overtime regulations apply. These calculations should consider components like commissions, bonuses, overtime pay, and expense reimbursements in accordance with state laws.
  9. Filing Federal Payroll Taxes in Colorado: Follow IRS guidelines, depositing employment taxes according to the schedule prescribed by the IRS, which is applicable in Connecticut as well.
  10. Maintaining Payroll Records: In Colorado, accurate employee payroll records, covering work hours, pay statements, tax forms, and other relevant paperwork, are essential. State and federal laws require retaining these records for a minimum of three years to comply with audit regulations and address potential tax authority inquiries.
  11. Filing Annual Payroll Reports: Annual government reports, like W-2 and 1099 forms, must be completed. Employees should receive these forms by January 31 of the following year.

Final Thoughts

Managing payroll in Colorado can be a complex task. Employees need to ensure strict compliance with the state’s minimum wage regulations, tax obligations, and labor laws. To make managing payroll smoother, take a look at our selection of the top 6 applications tailored to streamline payroll duties in the United States. If you’ve already got a system in place, we have outlined ten tips to enhance your payroll procedures within the United States.

Important Cautionary Note

Throughout the creation of this guide, we have strived to provide information that is accurate. Nevertheless, we cannot guarantee the accuracy or timeliness of the information presented. Therefore, we recommend consulting qualified professionals before taking any actions based on the information provided within this guide. Please bear in mind that we assume no liability for any risks that may result from using this guide.