If you’re a credit card rewards junkie like I am, you might have considered paying your federal income taxes with a credit card to earn rewards.
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.
Of course, credit card rewards aren’t the only reason people consider paying their taxes with a credit card. If your taxes are due and you don’t have the cash to pay them, you may consider turning to your credit card as well.
Whether you want to earn rewards or you don’t have the cash to make your tax payment on time, here’s how to pay your taxes with a credit card and what to consider before you do it.
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 debit or credit card. Once you choose a processor, you have to fill out some basic information which usually includes:
- Your Social Security number or ITIN.
- Your spouse’s Social Security number or ITIN.
- Your first name.
- Your last name.
- Date of birth.
- Phone number.
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.
Ways to optimize using your credit card to pay your taxes
If you’re smart about paying your taxes with a credit card, you can get some massive benefits. These are some of the reasons I’d consider using a credit card to pay my taxes.
I love earning credit card sign-up bonuses. They’re an easy way to make a few hundred dollars for purchases I would have made anyway. Unfortunately, some of the sign-up bonuses have higher spending requirements, such as $5,000 over a three month period, that I might not be able to attain with my regular spending.
Rather than completely ignore these cards, which often have sizeable sign-up bonuses, you could use your quarterly estimated tax payments or your final tax due amount with one of these sign-up bonus credit cards. By doing so, it may push you over the spending requirement to earn a nice bonus.
For example, the Blue Cash Everyday® Card from American Express gives you $200 back when you spend $1,000 in the first three months of opening your account.
That’s not the biggest sign-up bonus in the world, but the Blue Cash Everyday® Card from American Express definitely has one of the lowest minimum spend requirements. Typically, you’ll need to spend in the thousands in order to get a couple of hundred dollars from a sign-up bonus. Thankfully, that’s not the case with this card.
The Blue Cash Everyday® Card from American Express also has no annual fee and you can earn 3% cash back at U.S. supermarkets on up to $6,000 a year in purchases (then 1%), 2% at U.S. gas stations and select U.S. department stores, and 1% on other purchases.
Annual spending requirements
Some credit cards offer bonuses for spending a certain amount on the credit card over a year. For instance, the Hilton Honors American Express Business Card offers a free weekend night reward after you make $15,000 in eligible purchases on your card account in a calendar year.
If you need a few thousand dollars to reach that reward threshold, it may be worth paying your taxes with the card. A $3,000 payment would result in a $56.10 payment using Pay1040.
Believe it or not, some credit cards may offer rewards that make paying your taxes with a credit card profitable even with the processing fees.
The Citi® Double Cash Card – 18 month BT offer offers 1% cash back on your purchases and 1% cash back for your payments for those purchases. This effective 2% cash back rate is higher than the 1.87% fee charged by Pay1040, which results in a net gain of 0.13% on your tax payments.
0% introductory APR offers
Paying your taxes with a credit card may be a decent option even if you aren’t trying to earn credit card rewards. If you owe taxes but can’t make the payment, the IRS charges interest and penalties.
You can avoid these extra charges by paying your tax bill with a credit card that offers an introductory 0% APR offer on purchases. You’ll still have to pay the payment processing fee for paying with a credit card but it could be cheaper than the ongoing penalties and interest the IRS charges you.
As an alternative to the Citi® Double Cash Card – 18 month BT offer, Blue Cash Everyday® Card from American Express offers a 0% intro APR on purchases for 15 months from the date of account opening. Then, after those 15 months, your rate goes up to 12.99% to 23.99% variable.
The caveat is you need to make sure you can pay off your credit card balance before the introductory APR expires. Otherwise, you could find yourself paying a much higher interest rate than you would have if you simply made a payment plan with the IRS directly.
Drawbacks of using a credit card to pay your taxes
Paying taxes with a credit card isn’t always a good idea. Here are a few things to consider before making a payment with your credit card.
Even though the processing fees are fully disclosed and easy to understand, it’s easy to underestimate their impact.
Pay1040’s fee on a $10,000 federal income tax payment would be $187. While this isn’t huge, you may want to skip paying with a credit card if you can’t afford to pay this extra fee immediately, or you simply don’t want to pay the fee.
Interest, fees, and other credit card fees or penalties
The real trouble with paying your taxes with a credit card comes when you don’t pay your credit card balance off in full.
If your credit card’s grace period isn’t active, interest charges can be significant. If your credit card payment puts you over your credit limit, you may have to pay an over-limit fee. If you forget to make your payment on time, you could also be charged with late fees or, in some cases, a penalty APR.
These fees and other charges often aren’t worth the credit card rewards you may earn.
The potential impact on your credit score
One unanticipated impact of paying taxes with a credit card is the impact on your credit score. Depending on the tax payment amount, the card you use, its credit limit, and your total available credit, a tax payment could have a large impact on your credit score.
Credit utilization, or the amount of credit used compared to your credit limit, consists of roughly 30% of your credit score. If you max out a credit card to pay your taxes, your credit score could suffer.
Always make sure you aren’t using a significant amount of your credit limit to pay your tax bill or pay off the credit card balance before it is reported to the credit bureaus.
Using tax software can make your life easier
If you’d rather file and pay your taxes owed with the same company, I don’t blame you. It’s much easier to only deal with one service than to juggle multiple services.
These companies offer payment options other than by credit card so you can avoid the fees, too. For example, they allow you to pay directly from your checking or savings account with no fee. Here are three tax preparation solutions you may want to consider and a bit about them.
H&R Block has traditionally been known for its local face-to-face tax preparation options. However, they also offer online tax preparation software to allow you to file your tax return yourself.
H&R Block charges an additional fee if you have to file a state tax return, but it is lower than the other two options listed below. The exact fee you’ll pay for your entire tax return depends on the level of complexity of your return. It’s possible you could file your federal and state income taxes for free if you have an extremely simple return.
For these reasons, H&R Block is currently best for those looking to prepare their tax return for the lowest price they can find.
I personally used TaxAct to file my income tax return this year and I like their software. It’s easy to use and costs less than TurboTax. Early in tax season, they’re usually one of the more competitively priced software products.
Tax Act also advertises a completely free filing option for both federal and state income taxes for those with the most basic tax returns. Otherwise, adding a state return will cost you $44.95 to $49.95 depending on the level of software you use.
TaxAct is usually a good choice for those looking to use polished software for a lower price as long as they’re comfortable with less robust support options.
TurboTax is one of the more established online tax preparation software options. It’s a name widely recognized by most people that file tax returns and their systems are well polished. That said, their services usually cost more than their competitors. Even so, TurboTax still offers an entirely free federal and state tax preparation option for simple tax returns.
In addition to the typical federal and state tax software fees, TurboTax provides add-on services you can use to help review or prepare your tax return. Their support is robust and helps you to feel comfortable with the tax preparation process.
You can even have a live Certified Public Accountant (CPA) help you with your return for a higher fee. TurboTax is usually best for people that are willing to pay for a better tax preparation experience and are willing to pay additional fees for customized advice if they need it.
Paying taxes with a credit card can be financially beneficial or financially devastating. Know yourself and whether you can make paying taxes with a credit card worth it. If you have trouble paying your credit card balances on a regular basis or you forget to make your payments on time, paying taxes with a credit card isn’t a great idea.
That said, if you’re like me and have spreadsheets detailing all of your credit cards, their due dates, and their rewards, and you’ve never missed a payment or paid a penny in interest, it might be a good idea. You could stand to earn quite a few benefits from paying your taxes with a credit card, including another sign-up bonus or two.