Is an S-corp election worth it in Colorado?

Work it out on your own numbers

The figures below use $100,000 of profit and our standard assumptions. Put your own in instead, this compares staying a sole proprietor against electing, with Colorado's own charges on the company included:

What the election is worth on $100,000 of profit

A single filer taking the standard deduction, paying themselves 40% of profit as salary, with $1,500 a year of payroll and filing cost:

The profit range where it actually pays in Colorado

From about $20,000 of profit upwards. Below that, the $1,500 of payroll cost is more than the saving.

What Colorado does differently

Colorado taxes the profit either way. Whether you take it as self-employment income or as salary plus distribution, roughly $4,000 of Colorado income tax sits on $100,000 of profit, the election moves the payroll-tax half of the bill, not the state half.

Colorado is one of 31 states with a pass-through entity tax. Entity pays state tax on behalf of owners. Owners get state tax credit on their personal return. The entity-level payment is deductible as a business expense, bypassing the $40,400 SALT cap. That is a genuine reason to elect beyond the payroll-tax saving, and it is not in the figures on this page, the calculation below is federal payroll tax against Colorado income tax as an individual.

The Colorado detail

C.R.S. 39-22-302 states an S corporation is not subject to Colorado income tax; it still files informational DR 0106 and nonresident shareholders are taxable. The SALT Parity Act entity-level tax is an optional annual election, not mandatory. The $25 is the periodic report fee.

We rate our confidence in this entry as medium: some of it comes from tax publishers and professional bodies rather than from Colorado's own revenue department. Confirm it before acting on it.

How much salary to pay yourself

Less salary means less payroll tax, so the arithmetic always points at the smallest salary you can justify. That is exactly why it is not a number to optimize: compensation has to be reasonable for the work you do, and the penalty for getting it wrong is reclassification plus back payroll tax. The cheapest row here is the riskiest one.

What this assumes

• Single filer, standard deduction, the business as the only income.
• 40% of profit taken as salary in the headline figures.
• $1,500 a year for payroll and a separate 1120-S, a cost estimate, not a tax figure, and it varies by provider.
• Comparing against a sole proprietorship. If you already trade through an LLC, some state fees are owed either way and are not a cost of electing.
• Anything listed as not modeled above is genuinely owed, it is excluded because it does not depend on profit, not because it is nil.

What these words mean

Nonresident

Someone who earns money in a place without living there. Most states and cities tax non-residents only on what they earned inside the boundary, and residents on everything.

Pass-through

A business that pays no tax itself, its profit passes through to the owners, who pay tax on it on their personal returns. S corporations, partnerships and most LLCs work this way.

Entity level

A tax charged to the company itself, before any profit reaches the owners, as opposed to a tax the owners pay on their own returns.

S corporation election

Asking the tax office to treat your company as a pass-through, so profit is taxed to you rather than to the company. The owner takes a salary and the rest as a distribution, which is what saves payroll tax.

Distribution

Profit paid out to a company’s owner that is not salary. It is not subject to payroll or self-employment tax, which is the whole point of the S corporation election. And why the salary has to be defensible.

Related

• S-corp calculator (all states)
• 1099 taxes in Colorado
• Quarterly payments in Colorado
• S-corp in Kansas
• S-corp in Nebraska
• S-corp in New Mexico
• S-corp in Oklahoma