You Can Pay Your Taxes With Credit Card But Should You
If you dont have the money to pay your taxes in full by the April deadline, putting what you owe on a credit card is certainly an option. Whether its a good option is another matter.
For one thing, youll have to pay an extra fee to use a credit card. That fee will probably be high enough to wipe out any credit card rewards youd earn. And if you carry the balance on your card, youll be charged interest probably at a higher rate than youd pay if you had worked out an installment plan with the IRS.
However, paying the IRS with your credit card could work in your favor in a couple of situations: when it helps you earn a sign-up bonus or when you use a 0% interest card.
Youll have to pay processing fees
When you pay taxes with a credit card, it will cost you more than if you paid by check.
Whenever you pay for anything with a credit card, theres a processing fee, usually 2% to 3% of the amount charged. These fees are mostly invisible to you, because the merchant pays them. If you buy something for $10, for example, the merchant may get only $9.70.
The IRS, however, is barred by law from paying credit card processing fees. If the IRS wont pay, who will? You.
Not a rewarding experience
Of course, this doesnt take into account credit card interest. Unless you plan to pay off the charge in full on your next statement, interest will change the calculation significantly.
The effects of interest
The bottom line
Buy Some Extra Time To Pay Your Taxes
One of TPGs 10 commandments for earning credit card rewards is never to pay interest charges. Its paramount that you never bite off more than you can chew. When paying your taxes with a credit card, make a note of when the first day of your new statement period begins on the card youre looking to use. This way, you may have up to 30 days until your statement closes and close to 60 days until you need to pay off your balance in full.
Some for an introductory period on new purchases, which equates to 12-15 months of interest-free payments on your tax bill. But you must pay off the entire balance in full before the promotional period ends or risk exorbitant interest charges.
You Wont Earn Significant Rewards
If you want to pay taxes with a credit card to earn rewards, you might end up disappointed.
Thats because cash back rewards cards generally top out at 2% for non-category purchases , and the return on points cards is similar. In those cases, youd merely offset the credit card fee.
As mentioned above, the Citi® Double Cash Card 18 month BT offer , one of the best flat-rate cards, provides 2% back for every purchase . If you use it to pay through Pay1040.com, youll get a 0.03% cash back equivalent, after the 1.87% fee which is inconsequential, but better than paying a fee.
When it comes to point cards, returns will vary depending on how you redeem the points. If you use the Chase Sapphire Preferred® Card , for example, youll get 1X point per dollar when paying your taxes. If you can redeem those points for $0.02 each by transferring to a travel partner youll get the equivalent of 2% cash back, thereby offsetting the payment processing fee.
Quite a few airline and hotel credit cards could earn enough in rewards value to offset the fees, as well. To get the best redemption rates, youd need to redeem your miles or points with the co-branded airline or hotel.
One of the biggest exceptions to these lackluster rewards comes in the form of signup bonus offers, which require a large amount of spending for a large reward like 50,000 points for spending $3,000 in 3 months.
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Drawbacks Of Paying Taxes With A Credit Card
If you pay with a credit card that offers a lower percentage of rewards than the fee, it doesn’t really make sense to use a credit card.
Interest charges on unpaid balances
If you use a credit card to pay taxes, it’s key to pay your balance in full by the due date to avoid interest charges. Otherwise, you can risk debt and high interest charges if you only make the minimum payment and carry a balance month-to-month.
For example, if you charge $1,000 in taxes to a credit card with the average 16.88% APR and only make minimum $35 payments, it’d take you roughly 37 months to pay it off and cost you $287 in interest charges. And if you pay with a credit card, you won’t be able to take advantage of any payment plans offered by the IRS.
High credit utilization rate
Paying taxes with a credit card can have a negative impact on your credit score. Charging high tax payments to a credit card can cause a spike in your credit utilization rate, which is the total percentage of your credit you use.
To calculate your utilization rate, simply divide your total credit card balance by your total available credit. So if you have two credit cards with a combined $3,000 balance and a total $10,000 credit limit, your utilization would be 30%. Adding a $2,000 tax payment to that would increase your utilization rate to 50%, which is high.
Limitations on taxes eligible for credit card payments
When Not To Pay Taxes With A Credit Card
If you can’t pay off your balance in full every month, you should avoid paying your taxes with your credit card. With average credit card interest rates around 15%, it is better to set up a payment plan with the IRS than pay huge interest charges from your credit card . Interest rates associated with an IRS payment plan will be around 5% or so.
Some on purchases for a limited time. It might be tempting to use one of these offers to spread out tax payments without incurring big interest charges, but be very careful. You’ll still need to make at least the minimum payment each month, and if you don’t pay off the balance before the promotional period ends, you’ll end up with high-interest debt.
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When Paying Taxes With A Credit Card Makes Sense And When It Doesnt
Despite the high cost of paying these credit card fees, there are several different scenarios in which it may be a good idea to pay your taxes with a credit card. First, there are some credit cards that offer rewards worth more than the fees.
For example, there are cards that offer 2% cash back, or travel statement credits worth 2% of the amount spent. So if a taxpayer uses one of these credit cards, and avoids interest by paying his or her statement balance in full, then it is possible to enjoy the convenience of paying by credit card while coming out just slightly ahead.
In addition, there are ways that credit card users might receive some interest-free financing of their tax debt.
Also, there are some credit cards that offer interest-free promotional financing on new purchases for at least six months after the account is opened, or as long as 18 months. By putting some or all of the tax payment on an eligible account, taxpayers can further extend payment while avoiding interest charges.
But if taxpayers are trying to finance their tax liability using a credit cards standard interest rate, then they will likely be paying more than if they used the IRSs own installment program. This program requires the payment of a one-time fee and currently charges approximately 3.4% annually, a much lower rate than most credit cards offer.
Get help filing taxes with H& R Block.
Use The Electronic Federal Tax Payment System
EFTPS is a free service offered by the IRS for dealing with personal and business tax payments. It is available year-round, but you must enroll to use the service. To enroll, youll need to register a bank account and the address associated with your tax return. Once you enroll, youll get an ID number and password and can make payments at any time.
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You’re Sharing Sensitive Information
When you go to the Plastiq website to make your payment to the CRA the first details they ask for are a social insurance number and first and last name. This can make some people uncomfortable as it is a third party. While the website is secure, there is no protection if someone was able to see that information. Choi says Plastiq adheres to the highest security standards that are used by all the big banks and is certified to process credit card payments. He adds, The specific pipeline created for the CRA tax initiative makes use of additional encryption technologies and leverages the trusted infrastructures of Canada’s largest banks and processors.
The Best Credit Cards For Tax Payments
- The Business Platinum Card® from American Express: Best for earning a large welcome bonus
- Capital One Spark Miles for Business: Best business card for straightforward rewards
The information on the Discover it Miles has been collected independently by The Points Guy. The card details on this page have not be reviewed or approved by the issuer.
Heres what you need to know about paying taxes with a credit card in 2021.
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Potential Procredit Card Rewards
If you happen to have a credit card that offers frequent-flyer miles or pays cash back, you might benefit from charging a transaction like an income tax bill, potentially earning yourself a free vacation or your next cash back bonus. The secret here is the size of your tax bill and your bonus.
In 2019, the payment processing fees for the three IRS-approved payment processors are 1.99%, 1.96% and 1.87% with minimum fees of $2.50, $2.69 and $2.59 respectively. So, if your tax bill is $500, youll pay a $9.95 fee if the processing fee is 1.99%. If your tax bill is $5,000 though, youll pay $99.50. If your rewards credit card offers a 1% cash back, you essentially lose money as your cash back reward will only be $5 or $50 with our two examples. But, if your reward is 2%, youll come out a bit ahead with a $10 or $100 reward.
Youll have to compare the rate of the reward to the rate of the fees and see if youre actually getting a deal or not, advises Zimmelman.
Some cards offer added rewards as a sign-up bonussee some rewards card options. You could get a new card and pay your taxes to take advantage of a bonus like this.
A note of cautioncheck the terms of your credit card. Some dont allow receiving rewards for payments to the IRS.
Using A Rewards Credit Card To Pay The Irs
Paying the IRS with a credit card can result in additional fees, but some savvy credit card holders are making back the cost in the form of rewards.
Will Woodard, Certified Financial Planner at DareCapital.com paid his taxes with one rewards credit card in order to reap the rewards. For him, the rewards outweigh the fees.
Using one card and paying it off simplifies expense tracking and builds rewards points, explains Woodard.
But this strategy only works if you pay the bill in full each month. Also, its important to understand the rewards structure on your card and how it compares to the fees you may incur. Are you making a profit by using a credit card or are you losing money?
If you do choose to use your credit card, consider a cash back or travel rewards card that offers a high return. Consider Chase Freedom Unlimited®, which offers 1.5% cash back on purchases.
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The Drawbacks Of Paying Taxes With A Credit Card
1. Paying interest. Its a terrible idea to finance your tax bill with your credit card. The average credit card has an interest rate of approximately 15% APR, and many are higher. Yet the IRS will offer you a payment plan with a much lower interest rate. If youre having trouble paying your taxes, dont just charge it to your credit card. Instead, speak with your accountant or tax advisor about alternatives.
2. Paying fees that cost more than the rewards are worth. Many people value their reward points and miles as higher than what they receive. For example, you might redeem your airline miles for a ticket that would have cost $500, but that might not be its true value. If you had to fly at an inconvenient date or time or take a longer route, then you arent getting the full value. And if a discount carrier offers a competing flight for less money, then you could also be overestimating the value of your award seat. Unless you would have paid cash for the exact same reservation, then your award is probably not worth its stated value to you.
When Does It Make Sense To Pay Your Taxes With A Credit Card
If you qualify for a card that actually earns you more rewards than the fees you’d pay, charging your taxes may be worth doing. Say your card pays you 2.5% back. If you’re paying $10,000 in taxes and incur a 1.96% fee for charging them, you’d still end up with $54 in rewards. Since it only takes a few seconds to submit a credit card payment, it may be worth doing. Just be sure to pay your card balance in full before incurring interest charges, which would dwarf the value of the small amount of rewards you’d receive.
If you’re trying to land a new cardmember sign-up bonus, paying your taxes on a card could also be a good way to do it. Say you need to spend $2,000 in the first three months to earn a $500 sign-up bonus. Charging your IRS bill could get you there.
If you can’t pay your taxes because you don’t have the money, this may be another circumstance when paying with a card makes sense. If you can obtain a card with a 0% promotional interest rate on purchases for a period of time , you’d buy yourself time to pay your taxes off interest-free. This could be cheaper than an IRS payment plan or personal loan, as long as you’re confident you can pay the card in full before you owe interest at the standard rate.
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Comparing Different Ways You Can Pay Your Taxes
If you owe taxes to the IRS, there are several ways to make your payments:
- You can make a direct payment from your bank account and there are no fees imposed for the transaction.
- You can wire the money from a bank account, although this option will almost certainly incur a fee.
- You can mail a money order to the IRS.
If you need to buy a little more time to pay your taxes, you can file an extension with the IRS or set up an installment agreement that includes a payment plan. You will, however, be expected to pay penalties and interest on the aforementioned payment plan. You can also pay your taxes with a debit card and while the fee is minimal, you wont earn any valuable travel rewards or cash back.
Fortunately, the IRS lets you pay your tax bill with a credit card through several third-party payment processors. But be warned these companies are allowed to tack on fees unto your payments. You can see a list of these companies and their convenience fees at this link to the IRS website.
Can A Debt Collector Take You To Jail
The Fair Debt Collection Practice Act prohibits debt collectors from threatening you with criminal prosecution and jail time. However, that doesnt mean you cant go to jail. Even though you cant be charged with a criminal act for not paying your debts, debt collectors can take you to civil court and get a judgment in their favor.
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Can You Pay Irs Taxes With A Credit Card
If youre not getting a tax refund and you have to pay, you can pay IRS taxes with a credit card. Depending on who you talk to, paying your income taxes with a credit card is either brilliant way to earn credit card rewards or a financial move that is only a last resort. The IRS doesnt actually accept credit card payments directly. But you can pay the IRS through a third-party payment processorfor a processing feefor the convenience of paying your federal taxes with a credit card, debit card, or digital wallet. These processors charge roughly 2% of your total payment if you pay with a credit card.
Why pay with a credit card? If you have a rewards card, its one more expense that you can earn rewards on. However, if you use payment processing service, make sure your rewards outweigh the cost of the processing fee.
If you have the money, you want to pay taxes with cash, said Barbara Taibi, a partner at the global accounting firm EisnerAmper. You should probably only use a credit card if the rewards you get from the credit card are going to outweigh the convenience fees you pay to charge it.
Alternatively, you can use a credit card to pay for a software or online tax preparation with efile and epay capabilities and that files your tax return for you. Similarly, you can pay a professional tax preparer to prepare and file your taxes and use your credit card to pay the preparer. With these approaches, you avoid the processing fee and fully maximize your rewards.