When it comes to credit cards, I like to think I have a better grasp than most people. Indeed, I have tested out more credit cards than I care to count in the course of writing dozens of reviews for Money Crashers.
Therefore, I was recently astonished and a bit humiliated to find that taxpayers are allowed to pay federal taxes through credit cards by the IRS. It’s possible to use a credit card to settle your annual tax bill for the vast majority of individuals who file.
Payment cards can also be used by freelancers and small business owners who are responsible for making quarterly anticipated tax payments. Generally, business owners can pay their tax bills on credit, but there are a few exceptions, mainly related to withholding taxes.
Using a Credit Card to Pay Taxes: Accepted Vendors & Fees
It is not complicated to use a credit card to pay federal taxes. Learn the ins and outs of filing taxes with the Internal Revenue Service with this helpful guide. Credit cards can be used to pay state income taxes in almost every state that requires payment of such taxes.
Mastercard provides a helpful reference guide for navigating state income tax payment systems, including information for both individuals and businesses.
It’s important to distinguish between remitting a tax payment and forking over cash to a tax preparer. An intermediary collects tax payments and sends them on to the Internal Revenue Service or the appropriate state tax agency.
The person or company you hire to do your tax preparation receives any fees you agree to pay them. Since taxpayers often make both of these payments at the same time, it’s easy to see how newcomers could get them mixed up.
Tax Payment Processing Vendors Approved by the IRS
There are three payment processing companies that have been approved by the IRS to accept paper tax returns and forms:
- Pay1040.com: 1.87% of the total tax paid or $2.59 minimum ($2.58 minimum for debit card payments)
- PayUSATax.com: 1.96% of the total tax paid (or $2.55 for debit card transactions)
- OfficialPayments.com/fed: 1.99% of the total tax paid or $2.50 minimum
Be aware that quarterly anticipated tax payments made through credit cards do not necessitate the use of printed vouchers. Credit cards from Visa, Mastercard, and American Express, as well as the most common mobile wallets, are accepted at all three stores.
To pay their taxes and file their returns electronically, taxpayers have a choice between three IRS-approved processors. Both Official Payments and Pay1040.com have trusted TurboTax partners.
You can save up to $30 on tax preparation expenses with Official Payments, and up to $15 on TurboTax preparation fees with Pay1040.com. If you want to know how often you can pay certain taxes, you can look at the IRS’s Frequency Limit Table by Type of Tax Payment.
Things to Consider When Paying Taxes With Your Credit Card
Consider the following before arranging a tax payment via credit card:
- Abandonment of Payment. Credit card tax payments are generally nonrefundable. If you want specifics and possible exemptions, you should contact the IRS.
Sign-up Bonuses for New Cards. You should apply for a new credit card with a lucrative sign-up bonus before you pay your taxes. Some of the finest sign-up bonus credit cards on the market come with incentives of $4,000, $5,000, or even $10,000, as will be seen in the next sections. The caveat is that you have a limited amount of time, usually three months from the date of account opening, to hit a very high spending threshold. A wonderful approach to speed up your journey toward the threshold without spending money on unnecessary items is to pay your taxes at the end of the year or pay your projected taxes.
- Government Tax Liens. Credit card tax payments will not remove a federal tax lien for unpaid tax debt. For help, contact the Internal Revenue Service and an accountant.
- Funding Arrangements. Don’t assume that using a credit card is the best option if you can’t pay your tax bill in full right immediately. The Internal Revenue Service (IRS) allows you to set up an online payment plan for either immediate payment or a shorter-term (120 days or less) or longer-term (more than 120 days) payment. Payments are also free of charge if you want to have funds automatically deducted from an associated bank account, which is an option available for both immediate and short-term plans. Penalties and costs (up to 0.5% of the unpaid responsibility, assessed monthly) are added to the unpaid balance of a long-term plan every month until the balance is paid in full, for a total of $31 for direct debit and $149 for manual payment. Still, the total interest paid on a credit card amount over the same time period can be lower than these expenditures.
- Acknowledging and Fulfilling all Financial Obligations. Payment in full by the due date on your credit card statement is recommended, especially if you are not eligible for an introductory rate of 0% APR. Interest on unpaid balances from one month to the next can add up quickly, with typical rates ranging from 10% to 30% APR or higher, however, this will vary by card, creditworthiness, market rates, and other factors. Try to avoid using a credit card to pay your taxes if you use it for a lot of other things and you think you could have difficulties fitting a three- or four-figure tax payment onto your credit card several times a year.
Benefits of Using a Credit Card to Pay Your Taxes
Credit card tax payments offer a number of benefits, including improved cash flow, the opportunity to establish credit, and the removal of the need for an extension form.
- Benefits the Flow of Money. Payment of taxes, like other big outlays, can cause financial disruption. It probably doesn’t help if you’re already strapped for cash to submit hundreds or thousands of dollars to the Internal Revenue Service. Spreading out your tax payments across several months with a credit card will help lessen the pressure for a while. By setting up automatic payments to go through at the beginning of your card’s statement cycle, you can buy yourself up to four weeks of grace. It’s even better if you can get an introductory financing package with a low-interest rate that lasts for a while. Some of the special introductory prices listed below are valid for as long as 21 months.
- A chance to establish credit and improve one’s credit rating. Consider applying for a secured credit card and utilizing it to make your tax payments if repairing your credit after an adverse event like bankruptcy is a priority for you in the near future. Take a look at our recommended secured credit cards from major providers like Capital One and Citi for some inspiration.
- Expenses incurred could be written off by the government. A credit card payment processor’s convenience fees can be tax deductible if you itemize. That is not a minor point; A 2% convenience fee amounts to $60 on an estimated tax payment of $3,000. For sure confirmation that you qualify for the convenience fee deduction, see a tax expert.
- Possible Eligibility for Discounted Tax Software. Popular paid tax preparation software is sometimes offered at a discount by payment processors. To give just one example, this offer allows Pay1040.com customers to save up to $15 on legitimate purchases of TurboTax.
- You Have the Option to Schedule Future Payments. Another cash flow benefit of paying taxes using a credit card is the ability to postpone the payment date if you typically submit your taxes early.
- The ability to spend is boosted by making estimated tax payments. Making estimated tax payments can significantly increase your available credit, making it easier to meet the spending requirements for rewards cards with high minimums. These one-time spending minimums commonly approach $4,000 or $5,000 and are typically imposed three months after the account’s inception date. You probably won’t owe that much when you file unless you significantly overestimated your income or received a large windfall during the tax year. However, those numbers may be close to or even above what your expected quarterly tax payments would be. Further, some travel credit cards, like the American Express Delta SkyMiles Reserve Card, offer even higher expenditure requirements for those highly sought-after travel loyalty program bonuses. Heavy-spending After spending $500,000 on the card within a calendar year, Delta Reserve members are awarded a bonus of Medallion® Qualification Miles (MQMs).
- Payment in Parts Cancels the Need for an Extending Form. When making a partial payment of your annual taxes with a credit card, you are immediately granted an extension with no further papers needed. Filing Form 4868 with the IRS may be obligatory if you decide to use a different method of payment. Typically, the deadline to request an extension is six months after the original filing date, on October 15th.
Drawbacks of Using a Credit Card to Pay Your Taxes
Using a credit card to pay taxes has various negatives, such as processing fees, larger credit card balances and credit utilization ratios, and higher fees for integrated e-file and e-pay providers.
- Has a Minimum Processing Fee of 1.87 Percent. Every credit card processing service that is authorized by the IRS charges a fee for the service. You can pay as little as 1.87% with Pay1040.com or a flat $2.50 with OfficialPayments.com (for payments of $250 or less). Most of the best cash-back credit cards offer returns on spending no higher than 2% under normal circumstances, and these fees are large enough to offset or even outweigh such returns. If you don’t anticipate your tax payment to generate point or mile windfalls via sign-up incentives or continuous spending criteria, then your best bet is still to pay via paper check or EFT.
- Possibility of Significantly Increasing Credit Card Balances and Average Balance Utilization. Calculate your credit utilization ratio by dividing your current balance by your available credit. When determining your credit score, credit use is just one of the numerous factors considered. When everything else is the same, a high ratio can lower your score. If your overall credit limit is modest, making a significant end-of-year or projected tax payment could temporarily increase your credit utilization ratio and make it more difficult to qualify for new loans or lines of credit at reasonable interest rates. In a separate vein, it is more challenging to make timely payments toward large credit card amounts. Late payments may incur interest rates of 20% APR or more, depending on the type of card and the customer’s credit history.
- There Will Be Increased Costs for Companies that Offer Both Electronic Filing and Electronic Payments. Compared to mailing in a paper return, e-filing can save you time and effort. It’s also more pricey, which is a bummer. If you use the IRS’s streamlined e-file and e-pay feature, you’ll incur convenience fees that are almost certainly higher than the rate at which your rewards credit card earns cash back or points.
- No Federal Tax Deposits Can Be Made by Employers at This Time. To comply with IRS regulations, businesses that must withhold payroll taxes must submit deposits to the Treasury Department on a monthly or biweekly basis via the Electronic Federal Tax Payment System®. Your federal tax deposit cannot be done with a credit card. However, small business owners should prepare for this possibility anyway.
Don’t stress if you don’t anticipate a significant year-end or quarterly estimated tax due this year. A new credit card may come with a sign-up bonus if you use it to make a large purchase, such as a trip or house improvements.
Bear in mind that the ability to use a credit card is a perk and not a guarantee. Don’t risk getting into an unfavorable financial situation that you can easily avoid in order to gain some more cash back or reach the top of the sign-up bonus ladder. The fallout could affect your life for quite some time.