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To address the impact of changes to the federal Form W-4 starting in 2020 and Colorado income tax withholding that relies on the federal Form W-4, the Colorado Department of Revenue released a new withholding instruction worksheet that must be used by employers to calculate Colorado income tax withholding for employees that submit a federal Form W-4 in 2020 or later years.

Unlike most other states that have adopted a state-specific withholding certificate, Colorado intends to continue its use of the federal Form W-4 for determining state income tax withholding. Accordingly, it was necessary for the Department to issue guidelines on the computation of state income tax withholding for Forms W-4 submitted in 2020 and later years where the option to claim personal allowances is no longer available.

Colorado state income tax continues to be based on the taxpayer's federal taxable income.

For employees hired before 2020, and who do not plan to submit a new Form W-4 in 2020, employers may continue to use the current withholding tables and methods contained in the 2019–2020 Publication 1098, Colorado Income Tax Withholding Tables for Employers. Alternatively, employers may use the new 2020 worksheet.

Colorado withholding tables are typically updated for odd-numbered years.

Colorado taxpayers to see reduction in the flat income tax rate for 2019 on their state tax return

Colorado's flat income tax withholding rate remains at 4.63%. However, due to a state budget surplus, the individual income tax rate for 2019 was reduced to 4.5% under the state Taxpayer Bill of Rights (TABOR). Taxpayers will automatically receive the rate reduction when filing their 2019 Colorado state income tax returns.

See the TABOR website for more information. See also the Department's proposed regulation regarding the reduction.

Supplemental wages

The state personal income tax rate, used for regular and supplemental wages, remains at 4.63% for 2020.

Colorado law to require employers to file withholding returns electronically

As we reported, effective January 1, 2020, 2019 HB 1256 gives the Department the power to mandate that taxpayers file and pay taxes electronically. This includes requiring employers to electronically file withholding returns, including Forms W-2, and pay withholding taxes. (EY Payroll Newsflash, Vol. 20, #094, 7-17-2019.)

Currently, employers with 250 or more employees must file Forms W-2 electronically by January 31. Employers that withhold more than $50,000 of withholding tax annually must file all withholding payments by Electronic Funds Transfer (EFT). Employers filing and paying electronically do so over the Department's Revenue Online system.

The Department is directed to promulgate regulations to provide for the mandatory electronic filing of tax forms and payment of taxes, staggering the thresholds for the electronic filing requirement over a minimum three-year period, beginning with the largest taxpayers and allowing for additional time for small taxpayers to comply. For good cause, a taxpayer may file an annual request for waiver of the electronic filing and payment requirement.

The Department has not yet released proposed regulations that would provide for new mandatory electronic filing thresholds and procedures. Until a final regulation is released, employers should continue to follow current income tax regulations.

Calendar year 2019 Form W-2 filing

Calendar year 2019 Forms W-2/1099 must be submitted by January 31, 2020.

Employers filing 250 or more Forms W-2/1099 are required to file electronically over the Department's Revenue Online system. Employers filing fewer than 250 Forms W-2/1099 may elect to file electronically or submit paper copies along with Form 1093, Annual Transmittal of State W-2 Forms. Form DR 1106, Annual Transmittal of State 1099 Forms, is sent with paper Forms 1099 that show Colorado withholding or 1099-MISC with nonemployee compensation. Employers filing Forms W-2 electronically need only complete Form 1093 if paying additional withholding tax or requesting a refund — otherwise no transmittal is needed.

Specifications for filing Forms W-2 electronically can be found here.

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