Can I Pay My Taxes With a Credit Card: Generally paying your taxes with a credit card only makes sense if you receive more points then you pay in fees or if you secure an APR rate of 0% introductory.
Federal income tax payments can be large, especially if you’re self-employed and don’t have a job withholding your taxes for you. This presents a huge opportunity to increase your credit card spending, but it comes at a cost.
Paying your taxes with a credit card comes with some pretty hefty transaction fees.
How to Pay Your Taxes With Your Credit Card
Paying your federal income taxes with a credit card is a fairly straightforward process. Currently, the IRS partners with three payment processors which you can use to pay your taxes anytime. They include:
You can use these processors to pay with a credit card. Once you choose a processor, you have to fill out some basic information which usually includes:
Social Security number or ITIN
Spouse’s Social Security number or ITIN
Date of birth
While it may seem like a bad idea to give out your Social Security number, it is required because it is used to apply your tax payment to your tax file. You’ll also have to enter your payment information and confirm your payment.
Accept payments from Visa, Mastercard, Discover, American Express, STAR, Pulse, NYCE, Accel, Visa Checkout, MasterPass, Amex Express Checkout, and Paypal.
PayUSAtax charges a $2.55 fee for paying with a debit card or a 1.96% fee or $2.69 fee, whichever is greater, for paying with a credit card.
Accepts Visa, Mastercard, Discover, American Express, STAR, Pulse, NYCE, Visa Checkout, MasterPass, and Amex Express Checkout. Pay1040 charges $2.58 for debit card payments or a 1.87% or $2.59 fee, whichever is greater, for credit card payments.
Accept payments from Visa, Mastercard, Discover, American Express, STAR, Pulse, NYCE, Visa Checkout, and American Express Checkout.
OfficialPayments charges either a $2.00 or $3.95 fee for debit card payments. The higher fee applies to payments over $1,000. For credit card payments, this processor charges a 1.99% or $2.50 fee, whichever is greater.
Why Pay Taxes With a Credit Card?
Before you decide to pay taxes with a credit card, you need to understand your “why.” You should have a reason or incentive to pay taxes with a credit card. If you can’t come up with one, you’re much better off forgoing credit and paying your tax bill with a check instead.
If you have a credit card that offers generous rewards, you might want to pay your tax bill with the card to rack up points and then pay the balance immediately.
Just be sure you’re earning rewards at a higher rate than the processing fee.
Processing fees have come down a bit in recent years, while rewards have grown, meaning it is possible for the rewards to outweigh the fee with certain cards.
Meeting a Spending Bonus
Similarly, if your credit card offers a rewards bonus for meeting a certain spending threshold on an annual basis or at the end of the year, your tax bill could be a large enough expense to get you there.
This can be especially helpful for meeting the particularly high spending minimums for some lucrative travel rewards cards. Again, you need to pay the balance in a timely manner to avoid accruing interest and canceling out the value of the bonus.
Buying More Time
Paying taxes with a credit card is often driven more by the need for financing than rewards potential. “We’ve had several clients over the years with tax bills that they could not pay,” Zimmelman says.
“We recommended that they apply for a new credit card with an introductory 0% interest charge for 12 months. The only extra cost is the merchant processing fee.”
He adds that compared with the interest and penalties associated with an IRS installment plan, “this was a huge savings.” The key, though, is to pay off the balance before the introductory APR period is up.
Drawbacks of Paying Taxes With a Credit Card
Credit card tax payments incur a fee from the payment processor. The fee varies by processor and is currently 1.87% to 3.93% of the payment with a $2.50 to $3.95 minimum, according to the IRS.
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.
Credit score calculations weigh your credit utilization rate and it’s ideal to keep it as low as possible. FICO found that “high-achievers” (consumers with credit scores 750 and above) maintain utilization rates below 15%.
Limitations on Taxes Eligible for Credit Card Payments
While many tax payments can be made with a credit card, such as your annual tax return, not all IRS tax forms are eligible.
Alternatives to Paying Taxes With a Credit Card
Even if you don’t qualify for a card with a sign-up bonus or you’re fearful of getting further behind with your credit card debt, there are additional options.
The IRS allows you to apply for a payment plan, and the interest they charge is much lower than what you might pay when carrying the balance on an average credit card.
Here are the basic options:
You can delay payment for 120 days if your tax bill is less than $100,000. If you choose this short-term payment plan, you’ll pay around 5.5% interest, plus a late fee of 0.25% each month. (These payments will be deducted from your checking account by the IRS if the tax bill is more than $25,000.)
You can opt to make long-term installment payments through the IRS as well. This option comes with fees, including a $31 online setup fee, a late fee of 0.25% of your balance each month and interest of 3%, plus the federal short-term rate. The interest compounds daily.
Paying your tax bill with your credit card is doable, and it can put you ahead of the game, but it only works when you are eligible for a card with a sign-up bonus, an introductory 0% APR rate or both.
You also have to be diligent about sticking to the payment plan you impose on yourself. Otherwise, it’s better to set up a payment plan with the IRS.
They charge interest and fees, but these are much lower than the interest you’ll pay to carry debt on the average credit card.
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