Withholding Tax Guide

Part 1: Employers Who Must Withhold

Every employer making payment of Colorado wages is subject to the requirement to withhold Colorado income tax from such wages. This Part 1 discusses employers and employees subject to withholding requirements and provides guidance regarding employer registration and withholding certificates.

Employers and employees

In general, any employer-employee relationship for federal income tax purposes, for which withholding of federal income tax is required, is similarly considered an employer-employee relationship for the purposes of Colorado wage withholding requirements. Please see IRS Publication 15 (Circular E), Employer’s Tax Guide for guidance relating to employer-employee relationships for federal wage withholding purposes.

Employers

An employer is anyone for whom any employee performs or performed any services, of whatever nature, in exchange for payment of wages. An employer may be an individual, firm, corporation, partnership, limited liability company, or any other legal entity.

Any employer who either transacts business in Colorado or derives any income from Colorado sources is subject to Colorado wage withholding requirements, regardless of whether the employer maintains a permanent place of business in Colorado. Colorado wage withholding requirements apply to anyone who has control of the payment of wages or is the officer, agent, or employee of the person having control of the payment of wages.

Employees

An employee is any individual performing services for an employer, the performance of which services constitutes, establishes, and determines the relationship between the parties as that of employer and employee. Employees for which Colorado wage withholding is required include, but are not limited to:

• officers of corporations; and
• individuals, including elected officials, performing services for any local government in Colorado, the State of Colorado, the U.S. government or any agency or instrumentality thereof.

An employer is required to withhold Colorado income tax from wages paid for services performed:

• either wholly or partially in Colorado by an employee who is not a Colorado resident; or
• either inside or outside of Colorado, or both, by an employee who is a Colorado resident.

In the case of employees who perform services both inside and outside of Colorado, the portion of the wages that are subject to Colorado wage withholding is determined by multiple factors. Please see Part 2 of this publication for additional information.

Employer registration

Every employer who is required to withhold Colorado income tax must apply for and maintain an active Colorado wage withholding account. Employers may apply for an account online at mybiz.colorado.gov or by preparing and submitting a "Colorado Sales Tax and Withholding Account Application" (CR 0100AP), available online at Tax.Colorado.gov/withholding-forms.

An employer that goes out of business, dissolves or is merged into another corporation, no longer has employees, or otherwise ceases paying wages must, within 30 days of the final payment of wages, notify the Department and close their account either online at Colorado.gov/RevenueOnline or by preparing and submitting an "Address Change or Business Closure Form" (DR 1102), available online at Tax.Colorado.gov/withholding-forms.  

Withholding certificates

On or before an employee’s first day of employment, the employer must have the employee complete an Employee's Withholding Certificate, IRS Form W-4. In addition to IRS Form W‑4, an employee may elect to complete a "Colorado Employee Withholding Certificate" (DR 0004). Information provided on the IRS Form W-4 or Colorado form DR 0004 is required to calculate the required amount of withholding in accordance with the instructions provided in the "Colorado Withholding Worksheet for Employers" (DR 1098). Forms and instructions are available online at Tax.Colorado.gov/withholding-forms.

An employer must file promptly with the Department a copy of an employee’s IRS Form W-4 if all of the following conditions are met:

• The employee is expected to earn more than $200 per week.
• The employee claims exemption from withholding on their IRS Form W-4.
• The employee does not submit a completed Colorado form DR 0004 to the employer.

Along with the copy of IRS Form W-4, the employer must submit a cover letter listing the employer’s name, address, federal employer identification number (FEIN), and the number of forms submitted, if the employer is submitting forms for multiple employees with the letter. Employers must submit the required certificates and cover letter to:

Colorado Department of Revenue
Discovery Section
PO Box 17087
Denver, CO 80217-0087

Following a review of the forms and information submitted to the Department, the Department will advise the employer of any necessary adjustment to the employee’s withholding certificate.

Part 2: Wages Subject to Withholding

In general, wages are subject to Colorado wage withholding if they are subject to federal wage withholding requirements and are paid to either an employee who is a Colorado resident or an employee who is not a Colorado resident, but who performed work in Colorado. However, a variety of rules, based in part on the employee’s state of residence, affect the taxability of certain types of wages. This Part 2 provides guidance for determining whether an employee’s wages are subject to Colorado wage withholding.

Wages

Wages subject to Colorado wage withholding requirements generally include any wages subject to federal wage withholding requirements. Wages subject to federal wage withholding requirements generally include all compensation paid by an employer to an employee for services performed. The compensation may be paid in cash or made in other forms. Salaries, vacation allowances, bonuses, commissions, and fringe benefits are all forms of compensation subject to Colorado and federal wage withholding requirements. Please see IRS Publication 15 (Circular E), Employer’s Tax Guide for additional information about wages and compensation that are subject to wage withholding requirements.

Exempt wages

Under certain circumstances, wages may be exempt from Colorado wage withholding requirements, even if such wages are paid to a Colorado resident or for services performed in Colorado.

Wages that are exempt from federal wage withholding are generally exempt from Colorado wage withholding. See IRS Publication 15 (Circular E), Employer’s Tax Guide for additional information about wages and compensation that are exempt from wage withholding requirements.

Additionally, state and federal law provide exemptions from Colorado wage withholding for nonresidents in a variety of other circumstances, discussed later in this Part 2.

Resident employees

In general, an employer must withhold Colorado income tax from all wages paid to any employee who is a Colorado resident, regardless of whether the employee performed services inside or outside of Colorado, or both. However, Colorado withholding is not required for wages paid to a Colorado resident for services performed in another state that imposes income tax withholding requirements on such wages.

Colorado wage withholding is not required for compensation paid to a Colorado resident for active duty service in the armed forces of the United States if all of the following conditions are met:

• the servicemember’s home of record is Colorado
• the servicemember became a resident of another state; and
• thereafter the servicemember reacquired Colorado residency.

For additional information, please see Department publication "Income Tax Topics: Military Servicemembers", available online at Tax.Colorado.gov/current-guidance-publications.

Nonresident employees

In general, an employer must withhold Colorado income tax from wages paid to any employee who is not a Colorado resident for any services performed by that nonresident employee in Colorado. Services are performed in Colorado if the employee is physically present in Colorado at the time the employee performed the services.

If a nonresident employee performs services both inside and outside of Colorado during a pay period, the employee’s wages are apportioned to Colorado based on the number of days during the pay period the employee performs services in Colorado in relation to the total number of days the employee performed services during the pay period. An employee is deemed to have performed services in Colorado on any day in which the employee is physically present in Colorado for the majority of the time during which the employee performs services on such day.

An employee is deemed to be physically present in Colorado during any time the employee spends travelling to Colorado to perform services. An employee is not deemed to be physically present in Colorado during any time the employee spends travelling in departing from Colorado.

The following example illustrates the calculation of Colorado wages for a nonresident employee who works both inside and outside of Colorado.

Exempt wages for nonresident employees

Please see "Exempt Wages for Nonresident Employees", later in this publication, for a list of certain types of wages paid to nonresident employees that are exempt from Colorado wage withholding requirements.

Calculating Colorado wages for nonresidents

The following example illustrates the calculation of Colorado wages, subject to Colorado wage withholding, for a nonresident employee who works both inside and outside of Colorado during the pay period.

A nonresident employee performs services for his employer over a weekly pay period.

• Monday: The employee performs services exclusively in California.
• Tuesday: The employee spends four hours performing services in California, after which the employee takes a two-hour flight to Colorado. The employee performs no additional services on Tuesday after arriving in Colorado.
• Wednesday: The employee performs services exclusively in Colorado.
• Thursday: The employee spends two hours performing services in Colorado, before taking a two-hour flight back to California. The employee performs services for two additional hours after arriving in California on Thursday.
• Friday: The employee performs services exclusively in California.

The employee is deemed to be physically present in Colorado for the two hours he spends travelling to Colorado on Tuesday but is not deemed to have performed services in Colorado on Tuesday because he was not physically present in Colorado for the majority of the time during which he performed services that day.

The employee is not deemed to be physically present in Colorado for the two hours he spends travelling in departing Colorado on Thursday. He is not deemed to have performed services in Colorado on Thursday because he was not physically present in Colorado for the majority of the time during which he performed services that day.

The employee spent one day (Wednesday) out of the five days during the weekly pay period performing services in Colorado. Therefore, one-fifth or 20% of the employee’s wages for the pay period are Colorado wages subject to Colorado wage withholding.

Part 3: Collection and Remittance

Employers who are required to withhold Colorado income tax from employees’ wages are liable for the required withholding, regardless of whether they actually withheld the required amounts. Employers are required to file returns and remit tax on a quarterly, monthly, or weekly basis, depending upon the employer’s total annual withholding liability. The Department offers multiple filing and payment options, although employers may be required to remit payment electronically. This Part 3 provides information regarding employer liability, filing requirements, and payment options.

Employer liability for tax

Every employer is liable for any amounts of wage withholding required pursuant to Colorado law, this guidance, and the instructions provided in the "Colorado Withholding Worksheet for Employers" (DR 1098), irrespective of whether the employer actually deducts and withholds such amounts. In addition to any required amount an employer fails to withhold, the employer will be liable for any penalty and interest applicable thereto. In the event that the employee files a Colorado individual income tax return and pays any applicable tax due, the employer will be relieved of liability for the amount the employer failed to withhold, but will not be relieved of liability for any penalties or interest applicable thereto.

Every employer who deducts and withholds any amounts of Colorado wage withholding must hold such amounts in trust for the State of Colorado. In order to secure the payment of any amounts withheld and not remitted, the State of Colorado and the Department have a lien upon all of the assets of the employer and all property owned or used by the employer in the conduct of the employer’s business. Property that is subject to the lien includes, but is not limited to, stock in trade, business fixtures, and equipment. The lien is prior to any lien of any kind whatsoever, including existing liens for taxes. See section 39‑22‑604(7), C.R.S., for additional information about property in which a party other than the employer has an interest.

Employer protections

All Colorado income tax deducted and withheld by an employer from the wages of an employee is considered to be payment of Colorado income tax by the employee. An employee has no right of action against an employer with respect to any amounts deducted and withheld from the employee’s wages and paid over to the Department in compliance or in intended compliance with the withholding requirements prescribed by Colorado law.

Filing frequency and due dates

An employer is required to file returns and remit wage withholding tax quarterly, monthly, or weekly based upon the employer’s annual wage withholding liability. The required filing and remittance frequency is based initially on the employer’s estimated annual Colorado income tax withholding, reported on the employer’s application for a wage withholding account. If an employer’s actual Colorado income tax withholding for any calendar year exceeds the initial estimate, the Department will adjust the employer’s required filing and remittance frequency accordingly. Changes to the remittance frequency take effect on January 1.

The due dates for an employer’s filing and remittance are based upon the required frequency for the employer’s filing and remittance. If the due date for filing a return and remitting tax falls upon a Saturday, Sunday, or legal holiday, the return and tax are due on the next business day. An employer that goes out of business, dissolves or is merged into another corporation, no longer has employees, or otherwise ceases paying wages must file a final wage withholding return and remit all applicable taxes within 30 days of the final payment of wages, unless otherwise required to file and remit tax sooner.

Monthly and quarterly filers – but not weekly filers – are required to file a return for each period, even if no tax is due. An employer who properly withheld no tax for a monthly or quarterly filing period must file a return to report that no tax is due. If an employer fails to file a required return, the Department may estimate the amount of tax due, based on available information, and issue the employer a notice of deficiency for the tax due.

An employer whose business does not operate continuously throughout the year may request permission from the Department to file returns for only those periods that the business is in operation. If the Department grants such approval, the employer is not required to file returns for those months for which the business does not operate.

Weekly filing

Except for year-end filing periods, Friday is the end of each weekly filing period, even if the employer’s pay periods end on a different day. For each weekly filing period during which wages are paid, an employer must report and remit any required withholding for any wages paid during the period. When remitting payments via electronic funds transfer (EFT), the employer must indicate the Friday that ends the weekly filing period as the end date for the filing period.

Year-end weekly filing period

Each year, employers who remit Colorado wage withholding on a weekly basis will have a final filing period ending on December 31st, regardless of whether December 31st falls on a Friday. Employers must remit for this filing period any Colorado withholding for wages paid after the Friday that ended the last preceding filing period and either on or before December 31st. Payment for this final filing period is due on the third business day after December 31st.

Filing and payment options

Employers may elect or may be required to file and pay wage withholding tax electronically. The different filing and payment options are described below.

Electronic funds transfer (EFT)

Any employer who is required to remit wage withholding tax on a weekly basis is required to remit payment via electronic funds transfer (EFT). Employers are encouraged to remit payment via EFT, even if they are not required to do so, because electronic payment reduces the potential for processing errors and delays. Withholding payments made via EFT satisfy both payment and filing requirements. Employers who remit payment via EFT are not required to submit any separate quarterly, monthly, or weekly wage withholding return. If no tax is due for a filing period, an employer can report zero tax through the EFT payment system.

Information about electronic payment options is available online at Tax.Colorado.gov/remit-withholding-tax.

In general, payments made by EFT must be made by the end of the day on the due date. Please see 1 CCR 201-1, Rule 39-21-119.5 for additional information regarding the timeliness of payments made via EFT.

Other electronic filing and payment options

Employers who are not required to make payment via EFT can file returns and make payments electronically online at Colorado.gov/RevenueOnline. An employer must first sign up and create a login ID for Revenue Online in order to file and pay through Revenue Online. A third-party processing fee is added to any e-check or credit card payment made through Revenue Online.

Paper returns

An employer who is not required to remit payments via EFT can instead make payments with a "Colorado W-2 Wage Withholding Tax Return" (DR 1094). Paper returns and payments made by check or money order must be postmarked on or before the applicable due date to be considered timely.>

Correcting errors in filed returns

If a previously filed return did not report the correct amount of wage withholding for the filing period, the method for correcting the error depends on whether the tax was underpaid or overpaid with the filed return.

Underpayments of tax

If the wage withholding tax due for a filing period is greater than the amount previously reported and paid, the additional tax can be reported and paid via EFT, online at Colorado.gov/RevenueOnline, or by filing a second "Colorado W-2 Wage Withholding Tax Return" (DR 1094). Any return filed to report additional tax should not include any wage withholding tax previously reported and paid.

Overpayments of tax

If an employer overpays the wage withholding tax due for any filing period, the employer can deduct the amount of the overpayment from the tax reported and remitted for any subsequent filing period during the same calendar year.

If the calendar year has ended and the employer is therefore unable to deduct the overpayment from the tax due for a subsequent period, the employer can claim a refund for the overpayment when filing the "Annual Transmittal of State W-2 Forms" (DR 1093). Any Form DR 1093 filed to claim a refund for an overpayment must be filed prior to January 31^st of the following year.

If an overpayment of wage withholding tax is identified only after January 31^st of the following year and the filing of Form DR 1093, the employer can file a "Claim for Refund" (DR 0137) to request a refund for the overpayment.

Penalties and interest

If any tax is not paid by the applicable due date, the employer will owe a penalty. The penalty is the greater of either $5 or 5% of the unpaid tax, plus an additional 0.5% for each month the tax remains unpaid, not to exceed a total of 12%. A collection penalty equal to 15% of the unpaid tax is also imposed if an employer fails to remit payment within the time provided in any notice and demand for payment. Additional penalties may be imposed for:

• fraudulent or willful failure to file;
• filing a fraudulent, frivolous, or willfully false return;
• fraudulently failing to pay tax; or
• willfully seeing to evade tax.  

Interest accrues on any late payment of tax from the original due date of the tax to the date the tax is paid. The rate of interest accrual depends on the calendar year(s) over which the deficiency continues. Additionally, a discounted rate is allowed if the employer pays the tax in full prior to or within 30 days of the issuance of a notice of deficiency. The discounted and non-discounted, regular interest rates for recent years are listed in the following table.

Assessments and appeals

If, upon review of any relevant information, the Department determines the correct amount of tax has not been paid, the Department will issue a notice of deficiency to the employer. An employer who receives a notice of deficiency may submit a written protest and request a hearing to dispute the notice. Any protest or request for hearing must be submitted within 30 days of the date of the notice. The protest or request for hearing must contain at least the following information:

• the employer’s name, address, and account number;
• the tax period(s) involved;
• the type and amount of tax in dispute; and
• a summary statement of the findings with which the taxpayer does not agree and the grounds upon which the employer relies for the purpose of showing the tax is not due.

The protest or request for hearing must be signed by the employer. A protest or request for hearing may be submitted online at Colorado.gov/RevenueOnline or by mail, fax, or email in accordance with instructions included in the notice.

Appendix A: Electronic W-2 Specifications

The following is the required format of the data to submit W-2s electronically (CDOR-EFW2). This is the same format that is also required for submissions to the Social Security Administration.

For alpha/numeric fields

• Left-justify and fill with blanks

• Where the “CDOR Specific” shows “populate or zero fill,” all positions must be zeros, not blank

• Do NOT use Tabs in any field.

For money fields

• Must contain only numbers.

• No punctuation.

• No signed amounts (high order signed or low order signed).

• Include both dollars and cents with the decimal point assumed (example: $59.60 = 000005960).

• All state withholding shall be rounded to the nearest dollar (example: $5,500.99 = 0000550100).

• Right-justify and zero fill to the left.

• Any money field that has no amount to be reported must be filled with zeros, not blanks.

• Colorado withholding cannot be greater than Colorado taxable wages.

For the address fields

• Must conform to U.S. Postal Service rules since address fields are used by the Colorado Department of Revenue to prepare mail correspondence, if necessary. For more information refer to the U.S. Postal Service Web site at www.usps.com

• For State, use only the two-letter abbreviations in Appendix F of the SSA EFW2 publication.

• For Country Codes, use only the two-letter abbreviations in Appendix G of the SSA EFW2 publication. Do NOT use a Country Code when a United States address is shown.

For the Submitter Federal Employer Identification Number (FEIN)

• The FEIN must match the FEIN used to register with Revenue Online.

• Only numeric characters.

• Omit hyphens.

• For sole-proprietor submitters, use the sole-proprietor’s Social Security number.

For the employer FEIN

• Only numeric characters.

• Omit hyphens.

The employer FEIN should normally match the FEIN associated with the Colorado Department of Revenue account number.

For the format of the employee name

• Enter the name shown on the individual’s Social Security card.
• Must be submitted in the individual name fields:
  • Employee First Name
  • Employee Middle Name or Initial (if shown on Social Security card)
  • Employee Last Name
  • Suffix (if shown on Social Security card)
• Do NOT include any titles.

• Only numeric characters.
• Omit hyphens.
• May NOT begin with a 666 or 9.
• For valid range numbers, check the latest list of newly issued Social Security number ranges on the Social Security Department website at www.ssa.gov/employer
• If there is no SSN available for the employee, enter zeros (0) in positions 10 - 18 of the RS Record, and submit paper W-2 statements for the employee to: Colorado Department of Revenue, Discovery Section, PO Box 17087, Denver, CO 80217-0087, Attention: Withholding Unit Supervisor
• Affected employees shall also contact the Social Security office to obtain an SSN. Do NOT enter a fictitious SSN (for example, 111111111, 333333333 or 123456789).

• The RV record is not utilized by the Colorado Department of Revenue and should be excluded from the submission.
• Revenue Online will validate the full file and list all errors contained rather than rejecting after the first error is found.
• After a successful submission, Revenue Online will automatically populate the webpage with a confirmation. Print this page for your records.

Call (303) 205-8292, Monday through Friday, 8 a.m. to 5 p.m.

The following is the required information and specifications of the data to submit W-2s electronically (CDOR-EFW2).