How to Pay Taxes with Your Credit Card and Come Out AheadCredit Cards
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Tax time tends to come around more quickly than many of us like to think about.
The IRS filing deadline for tax returns is April 15, 2020, and this is when you’ll need to make your tax payment.
Even if you file for an extension — which would give you until October 15 to file your return — you will still have to pay your outstanding tax liability by April 15.
Of course, if you’re due a refund, you don’t have to worry about any of this because your taxes have already been paid throughout the year.
But if you typically don’t get a refund or you’re self-employed and responsible for making your own tax payments, and you aren’t able to pay your taxes in full when they’re due and filed, you may be able to set up a payment plan, but there are limitations on how often you can utilize this option.
Now, if you don’t file your taxes on time and don’t request an extension, the IRS will charge you an additional 5% on your balance for every month you’re late, up to 25%.
If you file your tax returns but don’t pay your outstanding tax liability, you may also be charged a penalty of 0.5% per month by the IRS.
In both cases, you will e charged interest on what you owe.
These are some of the milder consequences of not filing and paying your taxes on time.
Over time, the IRS can take steps, including garnishing your wages or seizing assets if you owe money, to ensure they get their due.
The IRS can also put a lien on your assets.
It’s best to be proactive when it comes to filing and paying your taxes, and if you don’t have the money to do so, there are other options, including using a credit card.
If you do use a credit card to pay your taxes, there are strategies you should use to ensure you’re making a smart short- and long-term financial decision.
Your Options for Paying Taxes
Regardless of your financial situation, there are several different ways you can go about paying the IRS.
You don’t have to pay a processing fee and you can schedule advance payments.
You can also change your payments or cancel them if you need to, once you’ve scheduled.
To set up DirectPay, you enter your personal information and add your bank account details.
You can make different types of payments to the IRS with DirectPay like Form 1040 and extension payments.
You can also schedule payments up to a year in advance if you register with the Electronic Federal Payment System (EFTPS).
If you need to pay estimated taxes, you can use this system operated by the Treasury Department.
There aren’t any processing fees charged if you use EFTPS.
You have to enroll initially to use this system, but once you enter your information, you don’t have to do it again every time you use it, unlike DirectPay.
Check Or Money Order
You can write a check and send it to the United States Treasury if you prefer to keep your payments offline.
If you’re going to send a check or money order with your tax return, you have to include Form 1040-V, which is your payment voucher.
Form 1040-ES is used for estimated tax payments.
Electronic Fund Withdrawal
If you have a checking account and you’d like to set up a direct debit so that payments come out of it, you can do so through tax prep software, but you usually need to e-file your return.
If a tax professional prepares your return, he or she can set this up for you.
If you’re in a situation where you don’t have the available cash to pay your taxes, you might consider a small personal loan.
Personal loans provide you with the funds to pay the IRS.
Then over time, you pay the loan back with interest.
The interest rate on a personal loan may be lower than what the IRS would charge you in both interest and penalties.
Yes, it stings to pay interest, but at least you won’t have to worry about the IRS garnishing your wages or putting a lien on your property.
The IRS does offer a payment plan option that may give you up to 120 additional days to pay what you owe.
In addition to payment plans, there are installment plans, but you have to pay a small fee to set one up.
The IRS will consider whether or not the burden of paying your tax bill would make it difficult for you to pay your living expenses.
There are limitations to any plan offered by the IRS, in addition to the fact you’ll be paying fees and interest.
Credit or Debit Card
You can also pay by credit or debit card, but you have to use an IRS-approved payment processor.
The IRS doesn’t directly accept card payments, which is why they work with outside payment processors.
There are three processors, and they charge a fee.
The fee varies depending on the company you use, and if you’re paying with a debit card, you’ll usually pay a flat fee.
If you’re paying with a credit card, the fee will be calculated as a percentage of your payment.
The IRS, through its payment processors, will accept all major credit cards, although you’ll have to pay the processing fee which may be as high as 1.99% — which is actually lower than the 2% rewards you could earn with a credit card.
Of course, if you are going to use a credit card, there are considerations to keep in mind, including the interest rate, rewards you might earn from doing so, and how that outstanding balance might impact your credit score because of your debt utilization ratio.
Pros of Paying Taxes with a Credit Card
There are upsides of paying your taxes with a credit card if you’re strategic in doing so.
You Have More Time
When you pay with a credit card, it can make your tax bill more manageable.
You’re not stuck paying a lump sum to the IRS all at once, which may not even be feasible for you.
Instead, you can ensure you pay everything to the IRS so you don’t have to think about them imposing consequences on you for not doing so.
You can then pay your monthly credit card bill as you’re able.
For some people, it’s much less stressful to pay a monthly credit card bill as opposed to dealing with the IRS.
You Can Earn Rewards
If you have a new credit card, a large purchase like paying your taxes can help you meet spending requirements for certain welcome offers and signup bonuses.
It Might be Interest-Free
Depending on the card you’re able to qualify for, you might be able to pay your taxes with it and pay no interest if there’s a promotion going on.
Cons of Paying Taxes with a Credit Card
There are also downsides of paying your taxes with a credit card, most of which stem from the card you choose to use.
You Will Pay Fees
Depending on the payment processor you use to pay the IRS, you will have to pay fees, and they can vary.
It’s possible, with a rewards credit card, that you could negate the impact of the payment processing fees.
All of the fees for paying directly with a credit card are under 2% currently.
If you have a credit card with a 2% cash back rewards structure, your rewards earnings will outweigh what you have to pay for processing.
The only time this wouldn’t be the case is if you owed very little in taxes and the minimum processing fee would be more than 2% of your payment.
If you are paying a lower amount in taxes, it might be better to choose the more expensive payment processor, Official Payments, because they have the lowest minimum fee.
If you’re paying a higher amount then going with the payment processor that charges the lowest overall rate is better because you want to pay the lowest possible percentage.
|Processor||Rate||Minimum Fee||Cheapest Option If:||2% Rewards Exceed Fee If:|
|PayUSATax||1.96%||$2.69||Payment More Than $135.17||Payment More Than $134.50|
|Official Payments||1.99%||$2.50||Payment Less Than $135.17||Payment More Than $125.00|
|Pay1040||2.49%||$2.59||Never Cheapest Option||Payment More Than $129.50|
You May Pay Interest
If you pay with a card that has a high interest rate and you don’t pay off your balance, you’re significantly adding on to what you ultimately pay for your taxes when all is said and done.
You Incur Debt
If you use a credit card, you’re accruing debt, so you need to ensure that you’re going to be able to make payments on time and that this debt won’t put you in a difficult financial situation.
If you aren’t able to make your credit card payments on time, you could be hit with additional penalties from the card company, which will also add to your overall tax payment.
How to Pay Your Taxes with a Credit Card
Other than paying off your balance quickly, the most important thing to keep in mind when it comes to paying your taxes with a credit card is choosing the right card.
Not all cards are created equally, and some cards are not well-suited to paying your taxes while others are.
Step 1: Choose the Right Credit Card
There are three main considerations when choosing a card to pay your taxes with:
- Interest Rate: Credit card interest can be brutal if you don’t pay off your balance, but obviously If you choose a card with a 0% introductory APR, you can have anywhere from 12 – 21 months to raise the cash to pay off your balance.
- Rewards: Many cards offer cash back or travel rewards that may exceed the credit card processing fee on, so be sure to keep this in mind when choosing a card.
- Sign-Up Bonus: Many card companies offer appealing sign-up bonuses but you have to meet a certain spending requirement within a set time period, usually around three months after you open a new account. Of course, you don’t want to overspend simply to meet the requirements for the sign-up bonus, which is a mistake people sometimes make. With taxes, you have to pay them anyway so you’re not spending on unnecessary things, but you can still meet the threshold for the sign-up bonus.
Good card options include:
Capital One® Venture® Rewards Credit Card
The Capital One Venture Rewards Card gives you two miles per dollar spent on the card, and each point is then worth 1 cent when you redeem through Capital One for travel. That means your overall return is 2%, which exceeds the processing fee on all three IRS payment processors.
But the real beauty of this card is its current welcome offer. If you’re new to the card, you earn 50,000 miles if you spend $3,000 within the first three months after you open the account, and you could easily charge that much when paying your taxes.
Since you’re not restricted to spending in certain categories to earn the maximum miles per dollar, this card provides you the flexibility that would make it an appealing way to pay your taxes.
- Capital One Venture Rewards Credit Card: Best for Simplicity
- Basics: The Capital One Venture Rewards Credit Card gives you two miles per dollar spent on the card. By our math (see below), each point is worth 1 cent each when you redeem for travel through Capital One, making your return 2%. There is a welcome offer of 50,000 miles with $3,000 spend within the first three months from opening the account.
- Our Math: The easiest ways to redeem Capital One Miles are to either receive a statement credit for travel purchases made on the card within the last 90 days or to book travel through Capital One travel. With both of those options, 100 Capital One miles is worth $1 of travel, making the miles worth 1 cent each. Note that transferring your miles to one of Capital One's airline partners could increase (as well as decrease) the value of your miles.
- Bottom Line: This card is a great credit card for those who value simplicity when it comes to rewards, but at the end of the day you're getting 2% rewards with a $95 annual fee. The Citi Double Cash, on the other hand, can earn you 2% cash back without an annual fee. That said, the Double Cash comes with a 3% foreign transaction fee. The Venture Rewards does not have a foreign transaction fee, so if you spend more than $3,166.67 ($95/3%) abroad per year, you would come out ahead with the Venture Rewards, assuming you value simplicity and just want one go-to card for everything.
- Welcome Offer
50,000 miles with $3,000 spend within first three months from opening account. Since 50,000 miles are worth approximately $500 when they are redeemed for travel through Capital One, this results in a 16.66% return on spend from the bonus alone.
- Annual Fee
$95, waived for first year
• Up to $100 credit for Global Entry or TSA Pre✓ every four years
• No foreign transaction fee
Citi Double Cash Card
You earn 1% cash back when you actually make a purchase, and then you get another 1% when you make a payment.
These 2% rewards exceed the processing fee for any of the IRS’ payment options.
And the icing on the cake is the card’s above-average introductory 0% APR for 18 months, which is one of the longest periods you’re going to find with any card.
- Citi Double Cash: Best Basic Cash Back Card
- Basics: This card essentially gives you 2% cash back on everything. You get 1% cash back when you swipe and an additional 1% when you make a payment.
- Example: Excluding housing costs (which typically can't be paid by credit card), the average American household spends $35,000 per year. If you put $35,000 annually on this card, you would earn $700 cash back.
- Bottom Line: While other cards may give you more rewards in certain categories like groceries or gas, this card has you covered when it comes to the bulk of your spending. I personally use this card whenever I make a purchase that doesn't fall into a bonus category on another card.
- Welcome Offer
None at this time
- Annual Fee
- Credit Score
Good - Excellent
Capital One® QuicksilverOne® Cash Rewards Credit Card
However, the Citi Double Cash can be difficult to be approved for since you need to decent credit to obtain it.
The QuicksilverOne is much easier to qualify for, and it can even help you build your credit since Capital One reports to all three credit bureaus.
So if you’re still building your credit and are looking to earn some cash back on your tax payment, the QuicksilverOne might be the card for you.
- Capital One QuicksilverOne Cash Rewards Credit Card: Best for Less-Than-Perfect Credit
- Basics: This card gives those with less-than-perfect credit the opportunity to earn unlimited 1.5% cash back on all purchases with a low $39 annual fee.
- Example: If you spend $6,000 annually on this card, you will earn $90 cash back. Netted with the annual fee of $39, you will end up with $51 back in your pocket. Make sure you are able to put at least $2,600 on this card annually or you will earn less cash back than the annual fee.
- Bottom Line: While this card's benefits are nothing to write home about, and it does come with a (small) annual fee, it is the best cash back card out there for those who are building their credit.
- Welcome Offer
None at this time
- Annual Fee
- Credit Score
Average, Fair, Limited
Step 2: Choose a Payment Processor
If you decide that paying your taxes with a card is a good option for you, it’s a straightforward process.
You can visit the IRS website, and they’ll then show you the three card processing options available to you.
Each will have the fee listed and the types of payments accepted.
You don’t have to send in a voucher if you use your card to pay.
Step 3: Go to the Processor’s Site and Make Your Payment
When you select a payment processor from the IRS website, it will take you to their third-party site.
You can then choose the type of tax payment you’re making — for example, Form 1040 series payments.
You also choose whether you’re paying business or personal taxes.
You add how much you want to pay, and you’re then shown the service fee and you have to accept the terms.
Frequently Asked Questions
The following are answers to questions you may have about paying your taxes with a credit card.
- What are the average interest rates for a credit card?
It’s really important to know the interest rate on your credit card before you use it to pay your taxes. Compare it to the interest rates and fees you’ll be charged by the IRS otherwise. If your card has a high interest rate, it’s unlikely the math is going to work out to use it to pay your taxes unless you can pay off the balance right away, and you’re just interested in earning rewards.
The average interest rate right now is around 17.30%.
If you do get a card with a low introductory APR, you want to ensure that you pay off what you charged to the IRS within that window and also be clear on what the APR is after the introductory period ends.
- Can you make a partial payment?
The IRS will let you set up a payment plan for a setup fee, but if you do so, you’re still going to have to pay the payment processing fees to use your card as well.
- Can you use more than one card to pay your taxes?
If you owe a high tax bill, you may not have the available credit on one card to pay it. You may also want to spread things out to take advantage of different card rewards programs, and you can use two different cards to make a payment. You can also pay part of your taxes with a card and then use another payment method altogether for the rest.
- Will taking the Earned Income Tax Credit delay my refund?
Yes, in an effort to combat fraud, the IRS is holding returns claiming the Earned Income Tax Refund until at least February 15. The IRS projects that it will begin issuing refunds by February 22.
- Can you pay a past due bill with a card?
If you have past-due taxes, you can still use your card and the IRS’s third-party processors to pay it as you would otherwise.
- What about making estimated tax payments with a card?
When you’re self-employed or work as a contractor or freelancer, you’re supposed to make estimated tax payments quarterly. You manually pay your estimated taxes throughout the year, and it’s a similar concept to employees having their taxes automatically withheld from their check.
If you overestimate how much you owe, you receive a refund. If you owe at tax time, you underestimated.
You can pay estimated taxes with a credit card.
- Is it possible to pay a tax lien with a credit card?
When you don’t pay your taxes, the IRS has far-reaching options available to them. One of those options is to put a lien on your assets. If you have a lien on your home, for example, you might not be able to sell it until it’s paid. Ultimately the assets with a lien can be seized.
If you have a federal tax lien on your assets, you can pay it with a credit or debit card. The lien itself isn’t removed until you file a certificate of release form, however.
- Are there types of taxes you can't pay with a credit card?
There are certain types of taxes that you can’t pay with a credit or debit card. Only certain returns are eligible for card payments, and you are also limited to how many times you can use a card to pay your taxes each year.
The individual Form 1040 can be paid with a card twice a year, and the Form 1040 Individual Tax Return Installment Agreement can be paid up to twice a month with a card.
You can’t use a credit card to pay Form 941 taxes, nor can you use it to pay federal tax deposits.
- How does using a credit card to pay your taxes affect your credit?
If you use a credit card to make a big purchase, such as paying your taxes, it’s going to affect your credit. Opening a new card affects your credit, first and foremost. Beyond that, you will be using more available credit, meaning that your credit utilization ratio will be affected. That could lower your score and a lower credit score may mean higher interest rates.
If you’re planning a big purchase soon that would require a credit check, carefully consider how paying your taxes with a card could affect that.
On the other hand, if you used an installment plan instead, it wouldn’t affect your credit.
- Can state taxes be paid by credit card?
Along with federal taxes, you may also have to pay state income taxes. These are paid separately, and most states except Alaska and Nevada do accept card payments, but again there’s going to be a fee to do so.
You can pay your taxes with a credit card, but whether or not it makes good financial sense for you depends on your individual situation and the type of card you would use.
As you decide, ensure that you know the ins and outs of your credit card’s terms.
You should also do the math and include payment processing fees, interest rates, credit card fees, and anything else that would be added to the total cost if you paid your taxes with a card.
If you find a strong rewards card, ideally with a 0% APR period, you may be able to come out on top paying your taxes with it.
Responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.
Ashley is a graduate of UNC-Chapel Hill where she studied journalism. She has worked as a journalist, content creator, and copywriter for nearly a decade, with a focus on personal finance, real estate, and healthcare. She now lives in Knoxville with her husband and young kids. During her free time, she enjoys traveling and enjoying the outdoors in East Tennessee.