Colorado Contractor Taxes and Licensing Guide

Generally no. Colorado doesn't tax construction labor. On a lump-sum job you pay sales tax on the building materials you buy. On a time-and-materials job you collect sales tax on the marked-up materials price, not on labor that's listed separately. Home-rule cities can add their own sales and use tax, often collected at the permit counter.

Does Colorado charge sales tax on contractor labor?

Not on the labor itself. What matters in Colorado is how your contract is written. The Department of Revenue's FYI Sales 6 splits jobs into two kinds, and the tax lands in a different place for each. Our labor vs. materials guide shows how other states handle the same question.

• Lump-sum contract. One price for the whole job, with no separate materials line. DOR says "the contractor is treated as the consumer of all construction and building materials" on the job. You pay sales tax when you buy the lumber and drywall, and you don't collect tax from the owner. You don't need a sales tax license for lump-sum work.
• Time-and-materials contract. Materials and labor are priced separately. Here you're treated as a retailer of the materials. You buy them tax-free with your sales tax license, then "collect sales tax from its customer on the marked up price of the materials." DOR says a retailer-contractor "should not collect tax on installation or labor charges if such charges are listed separately."

Watch the items that never count as building materials. DOR lists stoves, refrigerators, furnaces, air conditioners, garage doors, ready-made cabinets, electrical fixtures, carpet and sod as "non-building materials." If you sell and install those, you're the retailer and collect sales tax on them, whatever kind of contract you signed.

When do you owe use tax on materials and tools in Colorado?

Anything you use up on the job is yours to pay tax on. DOR says contractors "are consumers of any equipment and supplies they use in their work and must pay sales tax on these items at the time of purchase." If a seller didn't charge you Colorado tax, use tax is due instead. Our page on use tax for contractors walks through how that works.

• Out-of-state orders. DOR says contractors must remit consumer use tax on taxable items they haven't paid tax on, "including purchases made from vendors located outside of Colorado." Lump-sum contractors with no sales tax license report this on the Consumer Use Tax Return (DR 0252) or through Revenue Online.
• Pulling from your own stock. A retailer-contractor who bought materials tax-free, then uses them on a lump-sum job, owes use tax on those materials.
• Exempt projects. Building materials that become part of a structure owned by a government, a qualifying charity or a nonprofit school are exempt from state sales and use tax. You must file a Contractor Application for Exemption Certificate (DR 0172) before starting work, with a copy of the signed contract page. The prime gets one certificate per project and gives copies to subs. Tools and equipment you use on that job are still taxable.

Why do home-rule cities make Colorado sales tax harder?

This trips up contractors new to Colorado. DOR collects tax for the state, special districts, most counties and many cities. But cities with a home-rule charter can choose to run their own sales and use tax. DOR calls these "self-collected," and says they "are not administered by the Department." It also notes that all counties with a sales tax are state-collected except Denver County and Broomfield County.

For building materials, local use tax is often paid when you pull the permit. Under Colorado law, no city or county sales tax applies to construction and building materials if you show the seller a building permit or similar document that shows local use tax "has been paid or is required to be paid." That permit doesn't touch state or special district tax, so you still pay those at the counter. DOR says plainly that it "does not administer use taxes for any city or county," so ask each city's tax office how it handles contractors.

DOR's publication DR 1002 lists rates and home-rule city contacts and is updated every January 1 and July 1. If you file sales tax in several self-collecting cities, DOR's optional SUTS system lets you file one return for state-collected taxes and participating home-rule cities. Not every city takes part.

Which Colorado contractor licenses are state-issued?

Colorado has no statewide general contractor license. DORA's consumer page says "Not all occupations are licensed, such as roofers and general contractors," and points homeowners to their city or county. Some Colorado cities and counties run their own contractor licensing, so check each place you pull permits. Electrical and plumbing work are different: state boards license both. See our contractor license guide for the bigger picture.

What income tax do Colorado contractors pay?

Colorado has a flat income tax. DOR's individual income tax guide lists the rate at 4.4% for tax year 2025, after a temporary cut to 4.25% for 2024. The table on that page had no 2026 row when we checked, so confirm the current year's rate before you plan around it. Sole proprietors and most LLC owners pay on business profit through their personal return.

C corporations pay corporate income tax. DOR's corporate guide also lists 4.4% for 2025. Either way, set cash aside every month for federal and state income tax, not just the sales tax you collect. The quarterly estimated tax calculator gives you a starting number to bring to your CPA.

Is workers' comp required for Colorado contractors?

Yes, once you have a single employee. The Division of Workers' Compensation says Colorado employers "are required to carry workers' compensation insurance if they have one or more employees," whether part-time, full-time or family. Anyone you pay is presumed to be an employee. You can buy from a commercial carrier or qualify to self-insure, and the Division notes Pinnacol Assurance "is required to provide workers' compensation coverage for any Colorado employer." Our workers' compensation guide explains how premiums are set.

What else should you check before a Colorado job?

• Local rates. Combined rates vary by city, county and special district. Look up the job's location in DR 1002 or Revenue Online, and call home-rule cities directly.
• Write the contract on purpose. Lump-sum and time-and-materials jobs are taxed differently, so decide which you're signing before you buy materials.
• Lien rights. Read up on mechanics liens before you start, so you know your notice deadlines.
• Working nearby? Rules change at the border. See our pages for Wyoming, Utah and New Mexico.