Colorado Self Employment Tax: What You Need to Know

If you work for yourself in Colorado, you might be wondering whether you have to pay self-employment tax. You must pay self-employment tax in Colorado, to put it succinctly. The Federal Insurance Contributions Act (FICA) tax, which combines Social Security and Medicare taxes, is another name for this charge.

You must pay both the employer and employee components of the FICA tax if you are a self-employed person in Colorado. The current self-employment tax rate is 15.3%, which includes 2.9% for Medicare and 12.4% for Social Security. However, if your yearly net self-employment income is $400 or more, you are only liable to pay self-employment tax.

There are a few things you need to do if you run a business in Colorado and are thinking about closing it. Articles of Dissolution must first be submitted to the Secretary of State’s office in Colorado. This document formally closes your company and deletes its information from the state’s records.

In Colorado, dissolving an LLC costs $25. However, there can be extra charges if you owe taxes or fees. LLC versus S Corporation

You might be deciding between an LLC and a S corporation while opening a business in Colorado. Before choosing a choice, it’s critical to comprehend how they differ because each has benefits and drawbacks.

In terms of management and taxation, an LLC, or limited liability company, offers flexibility and simplicity. Profits and losses from LLCs are passed through to the owners’ individual tax returns because they are not taxed separately. Additionally, LLC owners are shielded from responsibility for the debts and liabilities of the business.

An S corporation, on the other hand, offers tax advantages and the opportunity for self-employment tax savings. The tax treatment of S corporations is that of pass-through entities, which means that income and losses are transferred to the owners’ individual tax returns. The full net income of the company is not subject to self-employment tax; only the wages are.

The possible reduction in self-employment taxes is one of the key advantages of a S corporation. Self-employment tax only applies to wages, not the full net profits of the business, as was previously mentioned. Accordingly, S corporation owners may pay less in self-employment taxes than owners of sole proprietorships or LLCs. A further advantage of a S corporation is its capacity to divide profits among its shareholders. S corporation owners are permitted to receive distributions from the company in addition to a fair wage for their labor in the company. The total amount of taxes owed by the company and its owners may decrease as a result.

In conclusion, Colorado requires self-employed people to pay self-employment tax, and ending a firm there requires filing Articles of Dissolution and making sure all due taxes and fees have been paid. It’s crucial to comprehend the distinctions and benefits of an LLC and a S corporation before choosing one over the other. While an LLC gives flexibility and simplicity in terms of management and taxation, a S corporation may offer tax advantages and the opportunity for self-employment tax savings.