I have no idea about servers or colocation.
But essentially when my IIS server is colocated does the server just need to be switched on to "work" or does a user (for e.g. Admin) need to be logged into windows for then IIS and other services to work?
This is such a newb question I understand that but I'm just trying to understand here.
Services like IIS are non-interactive (in fact, all services are non-interactive on Windows 2008), and run as a service user. This user may be a "regular" user, or special-purpose, but the user does not need to be logged in to a terminal session for IIS to be running.
They are the same as any other system you use, local or otherwise, The exact same rules apply.
So for the switched on part of your questions, what normally happens when a system is turned off? I think that will answer your query for you.