Top 10 Tax Mistakes Colorado Small Business Owners Make (and How to Avoid Them)

For years, Hiatt Accounting Group has sat at the same table as Colorado small business owners—helping them choose entities, clean up books, and navigate fast-changing rules at both the federal and state level. We wrote this post because the most expensive tax problems we fix are also the most avoidable. In a few minutes, you’ll see the ten mistakes we encounter most often—split into federal and Colorado-specific issues—each with a real-world example, the likely dollar impact, and the better alternative that preserves cash and peace of mind. If you run a service-based business in Colorado, this guide will help you spot risks early, make smarter year-round decisions, and keep more of what you earn.

FEDERAL: 5 costly, common mistakes

1) Missing the estimated-tax “safe harbor”

Mistake: Paying whatever you can each quarter instead of following the IRS safe-harbor rules.
Example: An S-Corp owner owed $24,000 for 2025 but only paid $15,000 in estimates; they didn’t meet a safe harbor → underpayment penalties.
Financial impact: ~$200–$700+ in penalties/interest (varies by dates and rates).
Better alternative: Pay the safe harbor: 100% of last year’s total tax (or 110% if prior-year AGI > $150k) or 90% of the current-year tax. That would have avoided penalties entirely.

2) S-Corp owners taking too-low “reasonable compensation”

Mistake: Disguising wages as distributions to minimize payroll taxes.
Example: Owner took $40k W-2 wages and $120k distributions. IRS reclassifies $40k of distributions as wages.
Financial impact: Back payroll taxes (~15.3% on $40k ≈ $6,120), plus penalties/interest.
Better alternative: Document and pay reasonable compensation (market-rate for the role), then distribute excess profit; you still preserve QBI potential and avoid reclassification risk.

3) Capitalizing when Sec. 179/bonus would be smarter (or vice versa)

Mistake: Defaulting to expense everything (or capitalizing everything) without a projection.
Example: $60k equipment purchase expensed in a low-profit year yields minimal tax value; next year’s high-profit year has fewer deductions left.
Financial impact: Timing mismatch can mean $2k–$8k more tax over two years.
Better alternative: Run a two-year projection. Sometimes capitalize to spread deductions; other times take SEC. 179/bonus to offset a spike year.

4) Skipping the 20% small-business profit deduction

Mistake: Missing the up-to-20% QBI write-off by paying too little owner W-2 wages or letting taxable income creep too high.
Example: An S-Corp with $190,000 profit pays the owner only $40,000 in W-2 wages, pushing income beyond QBI limits and shrinking the deduction.
Financial impact: Forfeiting a potential 20% deduction on $150,000 (~$30,000) can mean about $6,000–$7,200 in extra tax.
Better alternative: Set a credible owner salary, run a year-end projection, and use retirement/HSA funding and smart timing to keep income in the QBI-friendly range.

5) Worker misclassification (contractor vs. employee)

Mistake: Paying core staff on 1099 to “save” payroll taxes.
Example: Two “contractors” at $50k each fail control/behavioral tests → reclassified as employees.
Financial impact: Back FICA/FUTA/SUTA, penalties, potential benefits exposure; easily $10k–$25k+.
Better alternative: Apply the control/financial/relationship tests; when in doubt, put on payroll and implement an accountable plan for reimbursements.

COLORADO: 5 state-specific mistakes

1) Ignoring Sales and use tax (SUTS)/home-rule complexities

Mistake: Filing only state DR 0100 and missing home-rule obligations or mis-sourcing sales.
Example: A service shop with deliveries across cities files just at the state—misses local registration and misallocates tax.
Financial impact: Back tax + penalties/interest, often $1k–$5k+ depending on volume/jurisdictions.
Better alternative: Use SUTS to register, look up rates, and file across jurisdictions; keep addresses and sourcing rules clean.

2) Forgetting the Retail Delivery Fee (RDF) or applying it when exempt

Mistake A: Making taxable retail deliveries in Colorado but not filing RDF (DR-1786).
Mistake B: Charging/filing RDF even though you’re exempt.
Example: Retailer with $750k prior-year CO retail sales didn’t collect/file RDF for deliveries. Another with $300k prior-year sales kept charging RDF (unnecessary).
Financial impact: A: back RDF + penalties; B: customer refunds/admin time.
Better alternative: Know the thresholds: most retailers are exempt if prior-year CO retail sales ≤ $500,000 (separate $100k rule for certain out-of-state sellers/marketplaces). File only if you must.

3) Missing the Colorado PTET election (SALT parity)

Mistake: Eligible partnerships/S-Corps skip the PTET election and owners lose a big federal deduction at the entity level.
Example: Partnership paid $40k of CO income tax at the owner level. If they’d elected PTET, the entity would deduct $40k federally.
Financial impact: Lost federal deduction worth ~$8k–$10k (assuming 21–24% blended/owner rate context).
Better alternative: Evaluate PTET annually; elect on time and follow DOR guidance (no composite/DR0107 when PTET is elected).

4) FAMLI premiums set wrong (or not withheld)

Mistake: Not withholding/remitting 0.9% (0.45% employer / 0.45% employee by default) in 2025, or failing to update policies/payroll.
Example: 12 employees at $60k avg. pay → no FAMLI setup all year.
Financial impact: Employer owes $3,240 in premiums (0.45% × $720k) plus potential penalties; employee make-up contributions create HR headaches.
Better alternative: Implement FAMLI payroll settings, decide if employer covers full 0.9%, and post policy notices. Rate confirmed 0.9% for 2025.

5) Treating Colorado estimates, extensions, and local license renewals as afterthoughts

Mistake: Missing CO estimates or local renewals (e.g., city/county business licenses), creating a cascade of notices and late fees.
Example: LLC files federal extension but forgets CO estimate payment; owes tax plus late-pay penalties and interest; also misses a city renewal → separate fine.
Financial impact: Often hundreds to low-thousands between state/local penalties and interest.
Better alternative: Add a Colorado-specific compliance calendar (state estimates, DR-0100 frequency, RDF if applicable, local license renewals, personal property declarations). Tie it to your monthly close checklist.

Most small businesses wrestle with taxes and compliance because—surprise—they’re not tax pros; trying to DIY this stuff steals time from serving customers and growing revenue. We flip that script. With Hiatt Accounting Group, consider a custom-scoped, flat monthly retainer that covers your end-to-end accounting and tax needs—so you stay focused on operations while we own the financial responsibilities. Every retainer is built around proactive planning, monthly close discipline, clean records, and Colorado-specific compliance (SUTS, Retail Delivery Fee, FAMLI), plus strategic guidance on things like owner pay, deduction timing, and SALT/PTET—delivering the same benefits we outlined without you juggling piecemeal services. Let us strategize alongside you so the work actually gets done, notices get handled, and opportunities don’t slip by. If you want fewer surprises, audit-ready books, and a year-round tax strategy that protects cash, choose a partner who’s accountable month in and month out. Book a 30 or 60 minute consult today!

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Email: ahiatt@hiattaccountinggroup.com
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