Payroll & Hiring
The payroll taxes, Colorado requirements, and everyday costs to budget for before you make your first offer.
Quick Answer
What does an employee really cost beyond their paycheck?
Beyond wages, employers pay their share of Social Security and Medicare taxes (7.65% combined), federal and state unemployment taxes, and in Colorado, FAMLI premiums and workers' compensation insurance. Add paid sick leave, benefits, equipment, payroll processing, and training time. The exact total depends on pay, your insurance and unemployment rates, and your business size, so build a full estimate before you make an offer.
You found someone you want to hire, you agreed on a wage, and the number feels manageable. Then the first payroll runs and the real cost is higher than you planned.
An employee's wage is only part of what they cost you. Employers pay additional taxes, insurance, and expenses on top of wages, and some of them are specific to Colorado. None of it is hard to understand, but all of it is easier to plan for before the offer letter than after.
This guide walks through what to budget for so your first hire doesn't surprise your cash flow.
Federal Payroll Taxes You Pay on Top of Wages
Social Security and Medicare (FICA)
When you pay an employee, you withhold their share of Social Security and Medicare taxes from their paycheck, and you pay a matching amount yourself. Your share is 6.2% for Social Security, up to an annual wage limit that changes each year, plus 1.45% for Medicare. That's 7.65% on top of every dollar of wages, up to the Social Security limit.
Federal unemployment tax (FUTA)
Employers also pay FUTA, and it's figured on only the first $7,000 of each employee's wages. The listed rate is 6.0%, but employers who pay their state unemployment taxes on time generally receive a credit that brings the effective rate down to 0.6%, or up to $42 per employee per year. That credit can be reduced if your state has borrowed from the federal government to pay unemployment benefits, so confirm the current year's rate.
Colorado Costs to Plan For
Colorado adds several costs that employers in other states don't always have, or that work differently here.
State unemployment insurance
Colorado employers pay unemployment insurance premiums on each employee's wages up to a state wage base that is much higher than the federal $7,000 and has been rising in recent years. New employers are assigned a starting rate, and your rate can change over time based on factors like your industry and claims history. Check the current wage base and your rate with the Colorado Department of Labor and Employment.
FAMLI premiums
Colorado's Paid Family and Medical Leave Insurance program, known as FAMLI, is funded by premiums based on employee wages. The premium is split between the employer and the employee. Employers with fewer than 10 employees generally don't have to pay the employer share, but they still need to withhold and remit the employee's portion. The rate is set each year, so confirm it at famli.colorado.gov.
Workers' compensation insurance
Colorado generally requires employers to carry workers' compensation coverage once they have employees. Premiums depend on the type of work employees do and on total payroll, so an office-based employee costs far less to insure than someone who works with equipment or on job sites. Ask your insurance agent for a quote before you hire, not after.
Paid sick leave
Under Colorado's Healthy Families and Workplaces Act, employees earn paid sick leave as they work, up to an annual cap. You'll need to track it, and you pay wages when employees use it, which means that time is part of what the employee costs you.
Costs That Never Show Up on a Pay Stub
Taxes and insurance are the costs you can calculate. These are the ones that tend to catch owners off guard:
- Benefits and paid time off. Health coverage, retirement contributions, vacation, and holidays all add to the total, even when they're modest.
- Equipment and software. A computer, phone, software licenses, uniforms, or tools.
- Recruiting and onboarding. Job postings, interview time, background checks, and the paperwork to set up a new employee.
- Training and ramp-up. A new hire usually isn't fully productive on day one, and you or a teammate spends time teaching the job.
- Payroll processing and compliance. Payroll software or a service, quarterly filings, and year-end W-2 reporting.
A Simple Example
Here is a simplified illustration of the federal portion only, for an employee earning $50,000 a year. It uses the rates described above and assumes the standard FUTA credit applies.
| Cost | Annual amount |
|---|---|
| Wages | $50,000 |
| Employer Social Security (6.2%) | $3,100 |
| Employer Medicare (1.45%) | $725 |
| FUTA (0.6% of the first $7,000) | $42 |
| Subtotal before Colorado and other costs | $53,867 |
This example is for illustration only. Rates and wage limits change, so verify current figures before budgeting.
That subtotal doesn't include Colorado unemployment insurance, FAMLI, workers' compensation, paid sick leave, benefits, equipment, or training. Those vary by business, which is exactly why the real number is worth calculating for your situation rather than guessing.
A note on contractors
Treating someone as an independent contractor to avoid these costs is risky. Whether a worker is an employee or a contractor depends on the actual working relationship, not on what you agree to call it, and misclassification can lead to back taxes and penalties.
How to Budget Before You Hire
- Start with the wage, then add the employer share of payroll taxes.
- Get a workers' compensation quote for the specific role.
- Confirm your Colorado unemployment rate and your FAMLI obligations.
- Decide your benefits and paid time off policy before you make the offer.
- List the equipment, software, and training the role will need.
- Compare the full cost to what the role will bring in or save you.
- Set up payroll before the first payday so withholding and filings are right from day one.
Where to confirm current rates
Federal payroll tax rules are in IRS Publication 15. Colorado unemployment insurance is handled by CDLE, and FAMLI details are at famli.colorado.gov.
Frequently Asked Questions
Do I pay payroll taxes on my own pay as a business owner?
It depends on your business structure. S corporation owners who work in the business must be paid reasonable W-2 wages, and those wages run through payroll like any other employee's. Sole proprietors and single-member LLCs generally don't run payroll for themselves.
Is it cheaper to hire a contractor than an employee?
Sometimes the invoice looks lower, but classification isn't a choice. If the working relationship looks like employment, the worker may need to be treated as an employee regardless of what the agreement says. If you're not sure, ask before you hire.
Do I need workers' compensation for my first employee in Colorado?
Colorado generally requires employers with employees to carry workers' compensation coverage. Confirm your specific situation with your insurance agent before the first day of work.
Do small employers have to pay into FAMLI?
Employers with fewer than 10 employees generally aren't required to pay the employer share of the premium, but they still withhold and remit the employee's portion. Check the current rules at famli.colorado.gov.
Planning your first hire? Latitude Tax Advisors runs payroll for small businesses and can help you estimate the full cost of an employee before you make an offer.
Talk With UsThis article is general information for small business owners and isn't tax, legal, or insurance advice. Rates, wage limits, and requirements change, so confirm current figures with the relevant agency or your advisor before making decisions.
