Withholding Tax Topics: Voluntary Withholding

Payers who voluntarily withhold Colorado income tax must comply with several requirements. They must register with the Colorado Department of Revenue. The payer must file returns and remit tax on a quarterly, monthly, or weekly basis, depending upon the payer’s total annual withholding liability. Finally, payers must report the Colorado withholding on the IRS Form 1099 they issue to the payee and must file the IRS Form 1099 with the Department.

This publication is designed to provide payers with general guidance regarding Colorado voluntary withholding requirements. Additional information can be found in the statutes, regulations, forms, and guidance listed at the end of this publication. Nothing in this publication modifies or is intended to modify the requirements of Colorado’s statutes and regulations. Payers are encouraged to consult their tax advisors for guidance regarding specific situations.

Voluntary withholding

If, by mutual agreement between the payer and payee, the payer voluntarily deducts and withholds Colorado income tax from a payment that is not otherwise subject to Colorado income tax withholding, the payer must comply with all applicable registration, filing, and remittance requirements.

Voluntary withholding is common with respect to retirement income reported on IRS Form 1099-R and unemployment compensation reported on IRS Form 1099-G.

The information in this publication does not apply to any payment for which Colorado income tax withholding is required, including but not limited to:

• any payment of wages or winnings that is subject to withholding;
• any payment for services that is subject to withholding under section 39-22-604(18), C.R.S.;
• any composite payment made by a partnership or S corporation on behalf of its nonresident partners or shareholders;
• nonresident beneficiary payments remitted with form DR 0104BEP; or
• nonresident real estate withholding remitted with form DR 1079.

Payer registration

Every payer who voluntarily withholds Colorado income tax must apply for and maintain an active Colorado withholding account. Payers may apply for an account by preparing and submitting a Colorado Sales Tax and Withholding Account Application (CR 0100).

A payer that goes out of business, dissolves, is merged into another corporation, no longer has payees, or otherwise ceases issuing payments must promptly notify the Department and close their account either through Revenue Online or by preparing and submitting a Business Tax Account Closure Form (DR 1108).

Filing frequency and due dates

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

Each return and remittance must include all Colorado withholding tax for payments made during the filing period.

The due date for a payer’s filing and remittance is based upon the required frequency for the payer’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. A payer that goes out of business, dissolves, is merged into another corporation, no longer has payees, or otherwise ceases issuing payments must file a final withholding return and remit all applicable taxes by the applicable due date.

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

A payer 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 payer 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 payer’s pay periods end on a different day. For each weekly filing period during which payments are issued, a payer must report and remit any required withholding for any payments issued during the period. When remitting payments via electronic funds transfer (EFT), the payer 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, payers who remit Colorado withholding on a weekly basis will have a final filing period ending on December 31st, regardless of whether December 31st falls on a Friday. Payers must remit for this filing period any Colorado withholding payments made 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.

In this example, the payer’s payment on Tuesday, the 27th, falls within the filing period ending Friday, the 30th. The withholding for this weekly filing period must be remitted to the Department by Wednesday, the 4th.

Filing and payment options

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

Electronic funds transfer (EFT)

Any payer who is required to remit withholding tax on a weekly basis is required to remit payment via electronic funds transfer (EFT). Payers 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. Payers who remit payment via EFT are not required to submit any separate quarterly, monthly, or weekly withholding return. If no tax is due for a filing period, a payer can report zero tax through the EFT payment system.

Information about electronic payment options is available online at Revenue Online.

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

Paper returns

Quarterly and monthly payers who are not required to remit payments via EFT can instead make payments with a 1099 Income Withholding Tax Return (DR 1107). 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 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 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, through Revenue Online or by filing a second 1099 Income Withholding Tax Return (DR 1107). Any return filed to report additional tax should not include any withholding tax previously reported and paid.

Overpayments of tax

If a payer overpays the withholding tax due for any filing period, the payer 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 payer is therefore unable to deduct the overpayment from the tax due for a subsequent period, the payer can claim a refund for the overpayment when filing the Annual Transmittal of State 1099 Forms (DR 1106). Any Form DR 1106 filed to claim a refund for an overpayment must be filed prior to January 31st of the following year.

If an overpayment of withholding tax is identified only after January 31st of the following year and the filing of Form DR 1106, the payer 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 payer 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 a payer 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 seeking 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 payer 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 payer. A payer who receives a notice of deficiency may submit a written protest or 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 payer’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 payer does not agree and the grounds upon which the payer relies for the purpose of showing the tax is not due.

The protest or request for hearing must be signed by the payer. A protest or request for hearing may be submitted through Revenue Online or by mail, fax, or email in accordance with instructions included in the notice.

Providing 1099s to payees

Federal law requires payers to provide each payee IRS Form 1099 reporting tax information for each calendar year. For example, payers must provide IRS Form 1099-R to recipients of pension, annuity, or retirement payments and IRS Form 1099-G to recipients of certain government payments, such as unemployment compensation. In addition to federal tax information, if a payer voluntarily withholds Colorado income tax, the payer must report the Colorado income tax withholding on an IRS Form 1099 issued to the payee. The payer must send IRS Form 1099 to the payee by January 31st of the following year. A payer that goes out of business, dissolves, is merged into another corporation, no longer has payees, or otherwise ceases issuing payments must provide IRS Form 1099 to each payee by the applicable federal deadline.

Any Form 1099 reporting Colorado tax information may be furnished to the payee electronically, to the extent permitted by federal law. For additional information about furnishing 1099s to payees electronically, see General Instructions for Certain Information Returns.

Filing 1099s with the Department

Every payer must file with the Department any 1099 reporting Colorado withholding. A payer must file any required 1099s for any calendar year must be filed with the Department on or before February 28th of the following year if filing on paper or by March 31st of the following year if filing electronically.

Electronic filing

A payer that is required to file federal 1099s electronically must also file any Colorado 1099s electronically. For federal 1099s required to be filed during calendar years 2024 and later, electronic filing is required if the payer is required to file 10 or more federal 1099s during the year. For additional information about federal electronic filing requirements, please see the IRS General Instructions for Certain Information Returns and E-file Information Returns.

A payer that is not required to file 1099s electronically may nonetheless elect to do so. Alternately, payers who are not required to file electronically may instead file paper copies of 1099s along with an Annual Transmittal of State 1099 Forms (DR 1106). A payer that files electronically should not submit a paper Form DR 1106, except to remit any additional tax due or claim a refund for an overpayment.

Electronic filing of 1099s is made through Revenue Online. Payers must register through the website at least five days prior to their initial electronic filing. Once a payer has registered through the website, the payer will not need to register again in order to file 1099s electronically for any subsequent year. Registration is requested by completing the following steps:

1. Go to Revenue Online.
2. Click on the hyperlink to “Submit Year-End Withholding” under the heading “Withholding.”
3. Click on the hyperlink to “Request Withholding Submitter Access.”
4. Enter the required information.

Once a payer has registered, the payer can file 1099s electronically through Revenue Online by clicking the same hyperlink to “Submit Year-End Withholding.” The payer can either manually enter 1099 information by clicking “Submit a Manual Withholding File” or can upload an electronic file in one of the allowable formats by clicking “Submit a Withholding File Attachment.” The template used for filing in an XLSX format is available online at Withholding Forms and Instructions.

Correcting errors on 1099s

If a 1099 issued by a payer does not report the correct amount of Colorado withholding, the payer is required to furnish both the payee and the Department with a corrected 1099 reporting the correct amount of withholding. The corrected 1099 must be provided to both the payee and the Department as soon as possible. Corrected 1099s should be mailed to the Department, along with a cover letter, to:

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

Additional resources

The following is a list of statutes, regulations, forms, and guidance pertaining to voluntary withholding. This list is not, and is not intended to be, an exhaustive list of authorities that govern the tax treatment of every situation. Individuals and businesses with specific questions should consult their tax advisors.

Statutes and regulations

• § 39-22-621. Interest and penalties.
• Rule 39-21-119.5–1. Requirements for Electronic Filing and Electronic Payment.
• Rule 39-22-604–3. Colorado Income Tax Withholding for Other Payments.
• 26 U.S.C. § 6011. General requirement of return, statement, or list.
• 26 U.S.C. § 6041. Information at source.
• 26 CFR § 1.6041-6. Returns made on Forms 1096 and 1099 under section 6041.
• 26 CFR § 31.6051-1. Statements for employees.
• 26 CFR § 301.6011-2. Required use of electronic form.

Forms and guidance

• Tax.Colorado.gov
• Revenue Online
• How to Pay/Remit Withholding Tax
• Withholding Forms and Instructions
• Annual Transmittal of State 1099 Forms (DR 1106)
• 1099 Income Withholding Tax Return (DR 1107)
• Claim for Refund (DR 0137)
• IRS General Instructions for Certain Information Returns
• IRS E-file Information Returns