CO FAMLI Payroll Tax for Contractors: What You Need to Know

The Colorado Family and Medical Leave Insurance (FAMLI) program is a state-mandated insurance program designed to provide paid leave for employees facing life events such as the birth of a child, a serious health condition, or caring for a loved one. While the program primarily impacts traditional employers and employees, many independent contractors and small business owners are unsure how it applies to them. This guide explores the CO FAMLI payroll tax for contractors, outlining the key aspects of the program, its financial implications, and what steps contractors should take to ensure compliance and maximize benefits.

What Is the CO FAMLI Program?

The Colorado Family and Medical Leave Insurance (FAMLI) program was established to ensure that workers in the state have access to paid leave when facing qualifying life events. The program is funded by a payroll tax and began collecting contributions in January 2023. Benefits became available starting in 2024.

FAMLI allows employees to take up to 12 weeks of paid leave (with an additional four weeks for pregnancy complications) while receiving a portion of their wages. The program is similar to other state-run paid leave programs across the country.

Who Pays for CO FAMLI?

FAMLI is funded through a payroll tax of 0.9% of wages in 2023 and 2024. The cost is split between employers and employees:

• Employers with 10 or more employees: Must contribute 0.45% of an employee’s wages, with the employee covering the other 0.45%.
• Employers with fewer than 10 employees: Are exempt from paying the employer portion, but employees are still required to contribute their 0.45%.
• Self-employed individuals and independent contractors: Participation is voluntary but comes with specific considerations.

How Does the CO FAMLI Payroll Tax Affect Contractors?

Unlike traditional employees, independent contractors and self-employed individuals are not automatically enrolled in the FAMLI program. However, they have the option to opt-in voluntarily and contribute to the program, allowing them to access paid leave benefits when needed.

Should Contractors Opt Into CO FAMLI?

Opting into CO FAMLI can provide financial security for independent contractors who may need paid time off due to a qualifying life event. However, there are a few key considerations:

Pros of Opting In

1. Access to Paid Leave – Self-employed individuals typically do not have access to paid time off. Opting in ensures financial support during medical emergencies, childbirth, or caregiving situations.
2. Protection Against Income Loss – If an unexpected illness or family emergency prevents you from working, FAMLI benefits can help replace a portion of lost income.
3. Competitive Advantage – Offering paid leave through FAMLI can make a contractor more attractive to clients who prioritize worker well-being.
4. Affordable Contribution Rate – The 0.9% contribution is relatively low compared to other forms of private disability or leave insurance.

Cons of Opting In

1. Additional Tax Obligation – Contractors must calculate and pay the contribution amount on their own, adding to their tax burden.
2. Commitment for Three Years – Once a contractor opts in, they are required to remain in the program for at least three years.
3. No Employer Contribution – Unlike traditional employees, self-employed individuals must pay the full 0.9% payroll tax themselves.

How to Opt Into CO FAMLI as a Contractor

For independent contractors who want to participate in FAMLI, the process is straightforward:

1. Register with the FAMLI Division – Contractors must sign up through the official Colorado Department of Labor and Employment (CDLE) website.
2. Calculate Contributions – Contractors must pay 0.9% of their reported self-employment income.
3. Make Quarterly Payments – Contributions are due on a quarterly basis and must be reported similarly to estimated tax payments.
4. Maintain Enrollment for Three Years – Once enrolled, contractors must remain in the program for at least three years before opting out.

How CO FAMLI Works for Contractors Who Hire Employees

If you operate as a small business owner with employees, you must comply with FAMLI requirements based on the size of your workforce:

• If you have fewer than 10 employees, your workers must contribute their portion (0.45%), but you are not required to pay the employer portion.
• If you have 10 or more employees, you must contribute the full 0.9% split between employer and employee contributions.
• 1099 Contractors Do Not Count Toward Employee Headcount – If you hire subcontractors, they are responsible for their own FAMLI contributions unless they opt out.

Tax and Bookkeeping Considerations for Contractors

Since FAMLI is a payroll tax, it must be factored into a contractor’s overall tax strategy. Here are a few key tips:

1. Budget for the Additional Tax

Contractors should incorporate the 0.9% contribution rate into their financial planning. Setting aside funds for quarterly payments can prevent surprises during tax season.

2. Track Self-Employment Income Accurately

Since contributions are based on earnings, maintaining accurate records is crucial. Utilize bookkeeping software or work with a professional bookkeeper to ensure compliance.

3. Deduct FAMLI Contributions as a Business Expense

Contributions to state-mandated leave programs may be deductible on federal tax returns. Contractors should consult a tax professional to determine eligibility.

4. Understand the Impact on Estimated Taxes

FAMLI contributions are separate from federal estimated tax payments but should be included in quarterly financial planning to avoid unexpected liabilities.

Common Questions About CO FAMLI for Contractors

1. Is participation in FAMLI mandatory for independent contractors? No, self-employed individuals and independent contractors are not required to participate, but they have the option to opt in.
2. What happens if I don’t contribute to FAMLI? If you do not opt in, you will not be eligible for paid leave benefits through the program.
3. How much will I receive in benefits if I opt in? Benefit amounts depend on income, with lower-income earners receiving a higher percentage of wage replacement. The program caps benefits at 90% of wages for low earners and decreases the percentage as income rises.
4. Can I opt out of FAMLI after enrolling? Once enrolled, contractors must remain in the program for at least three years before opting out.
5. How do I report my contributions? Contributions must be reported quarterly through the FAMLI portal, similar to estimated tax payments.

Final Thoughts

The CO FAMLI payroll tax for contractors is an important consideration for self-employed individuals and small business owners in Colorado. While participation is voluntary, opting in can provide financial security during critical life events. Contractors should weigh the benefits and costs carefully, keeping in mind the three-year commitment and the financial implications of self-funding contributions.

If you’re unsure whether FAMLI is the right choice for your business, consulting with a bookkeeping professional, such as Aladdin Bookkeeping: Bookkeeping for Contractors can help you navigate the complexities of tax planning, compliance, and financial management. Understanding your options now can help ensure that you make the best decision for your long-term business stability and personal well-being.