How Much Should a Colorado Small Business Set Aside for Taxes?
Colorado Tax Guide
A practical look at federal, Colorado, and local taxes, and how to build a set-aside that keeps April from becoming a surprise.
Quick Answer
How much should a Colorado small business set aside for taxes?
Many Colorado small business owners start by setting aside 25% to 30% of their net profit, not their revenue, to cover federal income tax, self-employment tax, and Colorado's flat state income tax. Higher earners may need to set aside 35% or more, while owners with modest profits or significant deductions may need less. Your actual number depends on your entity type, household income, and deductions.
One of the most common questions we hear from Colorado business owners is also one of the most important: how much of what I make should I be setting aside for taxes?
If you've come from a W-2 job, you're used to taxes being withheld from every paycheck. Once you're running your own business, that job falls to you. Set aside too little and you face a large bill in April, possibly with penalties. Set aside too much and you've tied up cash your business could have used to grow.
This guide walks through what you're actually saving for as a Colorado business owner, a worked example of how the numbers add up, and a simple system for setting money aside throughout the year.
The Short Answer
Many small business owners start by setting aside 25% to 30% of their net profit, not their revenue, for federal and Colorado income and self-employment taxes. Higher earners often need to set aside more, sometimes 35% or higher, while owners with modest profits or significant deductions may need less.
That range is a rule of thumb, not a calculation. Your actual number depends on your entity type, your total household income, your deductions, and how your business pays you. The rest of this post explains what goes into it, so you can tell whether the rule of thumb fits you.
"Set aside a percentage of your profit, not your revenue. Your expenses aren't taxed, but your profit is."
What You're Actually Saving For
For most owners of sole proprietorships, single-member LLCs, partnerships, and S corporations, business profit passes through to your personal return. That means your set-aside needs to cover a few different taxes.
Federal income tax
Federal income tax is based on your total household taxable income, including your business profit, your spouse's wages, and any other income. Because the federal system uses graduated brackets, each additional dollar of profit may be taxed at a higher rate than the last.
Self-employment tax
If you're a sole proprietor, single-member LLC owner, or active partner, you owe self-employment tax of 15.3% on most of your net earnings, covering both halves of Social Security and Medicare. For many owners, this is a bigger bill than federal income tax. S corp owners pay these taxes through payroll on their salary instead, which changes the math.
Colorado income tax
Colorado has a flat individual income tax, currently 4.4%, applied to your Colorado taxable income. The rate has been temporarily reduced in some years under Colorado's TABOR rules, so it's worth confirming the rate for the year you're planning for. Because the rate is flat, estimating your Colorado portion is more straightforward than estimating your federal tax.
A Worked Example
Consider a single Colorado sole proprietor with $100,000 in net profit, no other income, and the standard deduction.
Estimated Taxes on $100,000 of Net Profit
This owner lands right around 25%. Change any of the facts and the percentage moves. A spouse with a W-2 salary pushes more of the profit into higher federal brackets. Retirement contributions or large equipment purchases bring it down. An S corp election shifts part of the self-employment tax into payroll taxes on a salary and can reduce the total.
These figures are simplified estimates for illustration only. Your own numbers should come from a projection based on your actual income and deductions.
Colorado-Specific Taxes to Plan For
Income taxes are only part of the picture. Colorado businesses have a few other obligations that are easy to overlook when you're budgeting.
Sales tax isn't your money
If you sell taxable goods or services, the sales tax you collect belongs to the state and local governments, not your business. Keep it separate from your operating cash so it's there when your return is due. In Colorado Springs, a home-rule city, city sales tax is filed directly with the City of Colorado Springs, separately from the state, county, and special district portions filed with the Colorado Department of Revenue.
Payroll taxes, including FAMLI
If you have employees, including yourself as an S corp owner, your payroll costs include more than wages. There's the employer share of Social Security and Medicare, federal unemployment tax, Colorado unemployment insurance premiums, and Colorado's Paid Family and Medical Leave Insurance (FAMLI) premiums. How FAMLI premiums are split between employer and employee depends on the size of your business. Build these into your budget rather than treating them as a surprise at each payroll.
Business personal property tax
Colorado taxes business personal property, such as furniture, equipment, and computers, at the county level. Businesses with total personal property below a set value in a county may qualify for an exemption, though they may still need to file a declaration schedule with the county assessor. The threshold is adjusted periodically, so check the current figure with your county assessor, such as the El Paso County Assessor's Office for Colorado Springs businesses.
No occupational privilege tax in Colorado Springs
A handful of Colorado cities, including Denver and Aurora, charge an occupational privilege tax on employers and employees working within city limits. Colorado Springs does not, but if your business has employees working in one of those cities, it may apply to you.
The Colorado pass-through entity tax election
Colorado allows S corporations and partnerships to elect to pay state income tax at the entity level. The election was created as a workaround to the federal cap on deducting state and local taxes, and for some owners it can reduce federal tax. It also changes when and how the Colorado tax is paid, so if your business makes the election, your set-aside and estimated payment plan should reflect it.
A Simple System for Setting Money Aside
Knowing your percentage is only useful if the money is actually there when you need it. The most reliable approach is to make setting it aside automatic.
- Open a separate savings account used only for taxes, ideally at the same bank as your operating account so transfers are instant
- Transfer your set-aside percentage each time you're paid by a customer, or on a fixed weekly or monthly schedule
- Make federal and Colorado estimated tax payments from that account each quarter
- Keep collected sales tax in its own account or clearly tracked, separate from your income tax savings
- Review your percentage mid-year and again in the fall, when you have a better read on your annual profit
If you set aside a percentage of revenue rather than profit for simplicity, you'll need a smaller percentage, and it should be recalibrated whenever your margins change.
Quarterly Estimated Payments
Setting money aside is one step. Paying it on time is the other. The IRS and Colorado both expect tax to be paid as you earn income throughout the year, generally through quarterly estimated payments.
For calendar-year taxpayers, federal and Colorado individual estimated payments generally follow the same schedule: April 15, June 15, September 15, and January 15 of the following year, with dates shifting when they fall on a weekend or holiday.
Both the IRS and Colorado offer safe harbor rules that can protect you from underpayment penalties if your payments meet certain thresholds, often based on your prior year's tax. The federal and Colorado rules are similar but not identical. Our post on quarterly estimated taxes covers the details.
"A tax savings account you actually fund beats a perfect percentage you never follow."
Common Mistakes
Setting aside based on revenue without adjusting the percentage
Saving 25% of revenue when your margins are thin ties up far more cash than you need. Saving 25% of revenue when your margins are high may still leave you short.
Forgetting self-employment tax
Many first-year business owners plan for income tax but not self-employment tax, and are surprised when it turns out to be the larger bill.
Ignoring household income
If your spouse earns a salary, or you have investment or rental income, your business profit may be taxed at a higher federal rate than you'd expect.
Dipping into the tax account
A slow month makes the tax account tempting. Borrowing from it is how many business owners end up with a balance due they can't pay in April.
Never updating the number
A percentage that worked when you started may not fit after your profit doubles, you hire employees, or you make an S corp election.
How Latitude Helps
At Latitude Tax Advisors, we'd rather help you plan for your tax bill than help you react to it. That means knowing your coordinates: projecting your income, estimating your federal and Colorado liability, and giving you a set-aside percentage based on your actual numbers rather than a rule of thumb.
We revisit that number throughout the year as your business changes, coordinate your quarterly estimated payments, and look for ways to lower the bill itself, from retirement contributions to entity structure. The goal is simple: you know what you owe before it's due, and the money is already there.
Not sure your set-aside is on track? Latitude Tax Advisors works with small business owners to take the guesswork out of taxes and keep more of what they earn.
Frequently Asked Questions
How much should a Colorado small business owner set aside for taxes?
Many owners start with 25% to 30% of net profit to cover federal income tax, self-employment tax, and Colorado income tax. Higher earners may need 35% or more. Your actual number depends on your entity type, household income, and deductions.
What is the Colorado state income tax rate?
Colorado has a flat individual income tax rate, currently 4.4%. The rate has been temporarily reduced in some years under TABOR, so confirm the rate for the year you're planning for.
Do I need to make Colorado estimated tax payments?
Generally, yes, if you expect to owe Colorado tax beyond what's covered by withholding. Colorado estimated payments generally follow the same quarterly schedule as federal payments.
Should I set aside a percentage of revenue or profit?
Profit is more accurate, because you're taxed on profit, not revenue. If you use revenue for simplicity, use a lower percentage and recalibrate whenever your margins change.
Does Colorado Springs have a city income tax?
No. Colorado Springs doesn't have a city income tax or an occupational privilege tax, though a few other Colorado cities, including Denver and Aurora, charge an occupational privilege tax.
This article is for informational purposes only and does not constitute legal or tax advice. Consult a qualified professional for guidance specific to your situation.
