I like to think I know more about credit cards than the average person. I’ve written dozens of credit card reviews for Money Crashers, after all, and personally tried out more credit cards than I’d like to admit.
So, I was surprised and a little embarrassed to learn for the first time recently that the IRS permits taxpayers to make federal tax payments by credit card.
Virtually all individual filers are eligible to pay their year-end taxes by credit card. Freelancers and independent entrepreneurs responsible for quarterly estimated tax payments can pay those with plastic too. With some important caveats, particularly around withholding taxes, business owners are eligible to pay tax on credit.
In the following sections, we’ll take a closer look at:
- The basics and mechanics of paying taxes with a credit card
- The benefits of paying taxes with a credit card
- The drawbacks and limitations of paying taxes with a credit card
- The best credit cards to use for your tax payments
Paying Taxes With a Credit Card: Approved Vendors & Costs
Paying your federal taxes by credit card isn’t rocket science. This IRS primer outlines what you need to know about the process.
In virtually every state that collects them, you can pay state income taxes with a credit card as well. Check this nifty Mastercard cheat sheet for details about individual and business payment portals for state income taxes.
Pro Tip: Perhaps it goes without saying, but I’ll say it anyway: Paying your taxes and paying your tax preparation fees are two different things. Tax payments go to the IRS or state tax collectors through a payment processing intermediary. Tax preparation fees go to the accountant or software developer you retain to prepare your taxes. Since taxpayers frequently make these distinct payments simultaneously, it’s understandable when novices get them confused.
IRS-Approved Tax Payment Processing Vendors
Taxpayers willing to file paper returns and forms can choose from three IRS-approved payment processing vendors:
- Pay1040.com: 1.87% of the total tax paid or $2.59 minimum
- PayUSATax.com: 1.98% of the total tax paid or $2.65 minimum
- OfficialPayments.com/fed: 1.99% of the total tax paid or $2.50 minimum
Note that paper vouchers aren’t required for quarterly estimated tax payments made by credit card. All three vendors accept Visa, Mastercard, and American Express credit cards, plus popular mobile wallet providers.
Taxpayers who prefer to e-file their returns can chose from four IRS-approved processors for end-of-year payments, extension payments, and other types of tax payments accompanied by IRS forms:
- Pay1040.com: In partnership with TurboTax; 2.49% of the total tax paid or $3.95 minimum
- 1040.com: 2.35% of the total tax paid or $3.95 minimum
- Official Payments: In partnership with TurboTax; 2.49% of the total tax paid or $3.95 minimum
- FileYourTaxes.com: 3.93% of the total tax paid or $2.00 minimum
Check the IRS Frequency Limit Table by Type of Tax Payment for more information on when and how often you can make various types of tax payments.
Paying Taxes With Your Credit Card: Things to Keep in Mind
You’ll want to note these items before scheduling a credit card tax payment:
- Payment Cancellation. Under ordinary circumstances, you can’t cancel credit card tax payments. Check with the IRS for more details and potential loopholes.
- New Card Sign-Up Bonuses. Before paying your taxes, consider applying for a new credit card with an attractive sign-up bonus offer. The best sign-up bonus cards on the market, some of which I’ve mentioned below, have bonuses worth $400, $500, even $1,000. The catch: You have to meet a hefty spending threshold within a preset time frame, usually three months from your account opening date. Paying end-of-year or estimated taxes is a great way to accelerate your progress toward the threshold without spending on stuff you don’t really need.
- Federal Tax Liens. If you’re subject to a federal tax lien arising from an unpaid tax liability, tax payments made by credit card won’t automatically release the lien. Speak with the IRS and a tax professional for guidance.
- Installment Plans. If you can’t afford to pay your full tax liability right away, but aren’t sure that paying by credit card is the best choice, consider an installment plan instead. The IRS offers immediate, short-term (120 days or less), and long-term (more than 120 days) online payment plans. Setup is free for immediate and short-term plans, and payments cost nothing when you elect to direct-debit payments from a linked bank account. Long-term plans cost $31 to set up with direct debit or $149 to set up with manual payment, plus accrued penalties and fees (up to 0.5% of the unpaid liability, assessed monthly) until the balance is paid off in full. Still, these costs could be lower than the sum total of interest accrued on credit card balances carried over comparable time frames.
- Paying in Full. Unless you qualify for a 0% APR introductory rate, it’s best to pay off your credit card balance in full by your statement due date. Balances carried from month to month accrue interest at an impressive clip: anywhere from 10% APR to 25% APR or more, depending on your card, creditworthiness, prevailing rates, and other factors. If you use your credit card for lots of other purchases already and suspect you’ll have trouble accommodating the added burden of a three- or four-figure tax payment multiple times per year, look for an alternative tax payment method.
Advantages of Paying Your Taxes With a Credit Card
- Helps With Cash Flow. Like other large outlays, tax payments are financially disruptive. If money is tight throughout the year, sending off hundreds or thousands of dollars to the IRS probably doesn’t help matters. Putting periodic tax payments on your credit card eases the crunch for weeks or months. Scheduling payments for the beginning of your card’s statement period provides up to four weeks of breathing room. Taking advantage of a long 0% APR introductory financing offer is even better. Some introductory offers outlined below last as long as 21 months.
- Potential to Build Credit and Raise Your Credit Score. If your near-term goal is rebuilding your credit after an adverse event, such as bankruptcy, consider applying for a secured credit card and using it as a vehicle for your tax payments. For ideas, check out our list of the best secured credit cards on the market.
- Fees May Be Tax-Deductible. If you itemize deductions, you may be able to deduct the convenience fees charged by your chosen credit card payment processor. That’s not trivial: On a $3,000 estimated tax payment, a 2% convenience fee adds up to $60. The convenience fee deduction isn’t guaranteed, so check with a tax professional before assuming you qualify.
- May Qualify for Special Offers on Tax Prep Software. Some payment processing vendors offer special discounts and deals on popular online tax prep software. For instance, Pay1040.com users can save 20% on qualifying TurboTax purchases with this promotion.
- Can Set Your Payment Date Well in Advance. If you habitually file your taxes early, you can delay your payment date for weeks or months when you choose to pay with a credit card – another cash flow benefit to paying taxes with a credit card.
- Estimated Tax Payments Can Boost Spending Power. Estimated tax payments can dramatically boost your credit card spending power, bringing high-dollar sign-up bonus spend requirements within reach. These one-time spend thresholds, usually set at three months from the account opening date, frequently reach $4,000 or $5,000. Unless you’ve miscalculated your projected income or experienced an unexpected windfall during the tax year, you probably won’t owe that much when you file. But your quarterly estimated taxes could certainly approach or exceed those figures. And some travel credit cards, such as Delta Reserve® from American Express, have even higher spend thresholds for coveted travel loyalty program windfalls. Delta Reserve cardholders get 15,000 Medallion® Qualification Miles (MQMs) after charging $30,000 in eligible purchases during a calendar year, for instance.
- Partial Payments Negate Extension Form Requirements. When you partially pay your end-of-year taxes with a credit card, you automatically earn an extension without any additional paperwork required. When you opt for another form of payment, you may be required to file IRS Form 4868. The extension deadline is usually six months after the filing deadline: October 15 or thereabouts.
Disadvantages of Paying Your Taxes With a Credit Card
- Carries a Processing Fee of at Least 1.87%. Every IRS-approved credit card payment processor levies a convenience fee. As of the 2017 tax year, the lowest possible fee is 1.87% with Pay1040.com, or $2.50 flat (for smaller payments only) with OfficialPayments.com. These fees are high enough to eat up, and potentially exceed, earnings from most top cash back credit cards, whose returns on spending typically top out at 2% on general spending under normal circumstances. Paper check and EFT remain the cheapest tax payment methods.
- Can Substantially Increase Credit Card Balances and Utilization Ratio. Your credit utilization ratio is your total aggregate credit balance divided by your total aggregate credit limit. Credit utilization is one of several factors used to calculate your credit score. All other things being equal, a high ratio can adversely impact your score. If your aggregate credit limit is on the low side, a large end-of-year or estimated tax payment could spike your credit utilization ratio, temporarily affecting your ability to secure new loans or lines of credit on favorable terms. Separately, high credit card balances are tougher to pay off in full on time. Depending on your card and credit profile, your past-due balances could accrue interest at 20% APR or higher.
- Higher Fees for Integrated e-File and e-Pay Providers. E-filing is inarguably more convenient – and significantly faster – than submitting a paper return. Unfortunately, it’s also more expensive. Returns filed using the IRS’s integrated e-file and e-pay function carry convenience charges ranging from 2.35% to 3.93%.
- Employers Can’t Make Federal Tax Deposits. Per the IRS, employers bound to withhold employment taxes must make monthly or semiweekly federal tax deposits using the Electronic Federal Tax Payment System®. Federal tax deposits cannot be made with a credit card. Though this doesn’t affect individual filers directly, small business owners need to plan accordingly.
Best Credit Cards to Pay Your Taxes
When it comes to covering your tax liabilities, some credit cards are better than others. Here’s a quick look at the top credit cards to pay your end-of-year and quarterly estimated taxes by category.
Best Cash Back Credit Cards for Tax Payments
The most taxpayer-friendly cash back credit cards have outsize sign-up bonuses and offer relatively high ongoing returns on spending:
- Discover it®. Discover it® earns unlimited 1% cash back on all eligible purchases, including tax payments, and 5% cash back (up to $1,500 per quarter) on purchases in select rotating categories. Don’t hold your breath waiting for tax payments to rotate into the 5% bucket. Instead, apply for Discover it® right before making your end-of-year tax payments, then set it up to knock down all four of your estimated payments: April, June, September, and January. Discover automatically doubles all cash back earned during the first 12 months of card membership, so you’ll earn an effective 2% cash back rate on those payments, plus any other first-year spending.
- Chase Freedom Unlimited®. Chase Freedom Unlimited® also earns unlimited 1.5% cash back on all purchases, and its sign-up bonus is even better than Capital One® Spark® Miles Select for Business: up to $175 cash bonus on $500 in eligible purchases within 3 months. Plus, the 0% introductory purchase and balance transfer APR lasts 15 months after account opening – plenty of time to let those tax payments float.
- Blue Cash Preferred® Card from American Express. Blue Cash Preferred® Card from American Express is worth the $95 annual fee, thanks to a super-generous 6% cash back rate on supermarket purchases (up to $6,000 in total qualifying purchases per year) and unlimited 3% cash back on purchases at gas stations and select U.S. department stores. When you spend at least $1,000 within 3 months of signing up – manageable for many taxpayers – you’ll get a $200 statement credit.
Check out our guide to the best cash back credit cards for more ideas.
Best Travel Credit Cards for Tax Payments
Like their cash back counterparts, the best travel credit cards for tax payments have big sign-up bonuses and generous ongoing rewards programs:
- Barclaycard Arrival Plus® World Elite Mastercard®. Barclaycard Arrival Plus® World Elite Mastercard® earns unlimited 2 points per $1 spent on all eligible purchases. With points redeemable for statement credits against virtually any travel purchase and a 5% bonus on all redemptions, this works out to a 2.1% return on spending. Plus, new cardholders who spend at least $3,000 within 90 days of opening their accounts earn 40,000 bonus points – good for $400 in travel credits.
- Discover it® Miles. Like its cash back cousin, Discover it® Miles doubles cardholders’ rewards during the first 12 months of card membership. Since Discover it Miles earns unlimited 1.5 miles per $1 spent, this bonus is even more generous: a 3% return on spending during the first year. That’s more than enough to offset tax payment processors’ convenience fees.
- Chase Sapphire Preferred® Card. Chase Sapphire Preferred® Card is a premium travel credit card that earns unlimited 2 points per $1 spent on qualifying dining and travel purchases, and 1 point per $1 spent on all other purchases. The sign-up bonus is the main attraction for taxpayers: 50,000 bonus points, worth up to $625 when redeemed for travel, when you spend $4,000 in qualifying purchases within 3 months.
Check out our guide to the best travel rewards credit cards for more ideas.
Best Low APR Interest Credit Cards for Tax Payments
Low APR credit cards aren’t known for attractive rewards programs or luxurious value-added perks. They stand out with long 0% APR introductory promotions and regular APRs low enough to make short- and medium-term financing bearable:
- Citi® Simplicity® and Citi® Diamond Preferred®. Citi® Simplicity® and Citi® Diamond Preferred® are closely related cards renowned for super-long 0% APR introductory periods on purchases and balance transfers: 21 months from account opening. Needless to say, that’s music to taxpayers’ ears. Take your pick.
- Chase Slate®. Chase Slate® has a 15-month 0% APR introductory promotion on purchases and balance transfers, with balance transfer fees waived on transfers made within 60 days of account opening. If you’re looking to float your tax payments interest-free for months on end, Slate is almost as good as Simplicity or Diamond Preferred.
- PenFed Promise Visa® Card. PenFed Promise Visa® Card is one of the few low APR credit cards with a legitimate sign-up bonus: a $100 statement credit when you spend at least $1,500 in qualifying purchases within 90 days. The biggest drawback, the lack of an introductory APR promotion on purchases, is partly made up for by an exceptionally low regular APR: 9.49% to 17.99% APR on purchases, including tax payments, depending on prevailing rates and your personal creditworthiness.
Check out our guide to the best low APR interest credit cards for more ideas.
Best Small Business Credit Cards for Tax Payments
These taxpayer-friendly small business credit cards have fantastic sign-up bonuses and attractive ongoing rewards:
- Chase Ink Business Preferred Credit Card. Chase Ink Business Preferred Credit Card is a premium business credit card with a $95 annual fee. For taxpayers, the sign-up bonus is the main event here: 80,000 bonus points, worth up to $1,000 when redeemed for travel, on $5,000 in qualifying purchases within 3 months of account opening. Apply just before paying your end-of-year and April estimated taxes for maximum effect. Moving forward, Ink Business Preferred earns 3 points per $1 spent on qualifying travel, shipping, digital advertising, and telecom purchases, up to the first $150,000 in annual spending across all categories. All other qualifying purchases, including tax payments, earn unlimited 1 point per $1 spent. Points are generally worth $0.01 or less at redemption, but command a value of $0.0125 when redeemed for travel.
- SimplyCash® Plus Business Credit Card from American Express. SimplyCash® Plus Business Credit Card from American Express has one of the best sign-up bonuses of any no-annual-fee business card: $200 when you spend at least $5,000 within 6 months of your account opening date, and another $200 when you spend an additional $10,000 within 12 months of your account opening date. Plan your estimated tax payments accordingly. A 0% APR introductory purchase promotion lasts for 9 months from account opening, allowing ample time for your tax payments to float interest-free.
Check out our guide to the best small business credit cards for more ideas. If you need help determining the most advantageous legal structure for your business, review our guide to choosing the right legal business entity.
If you don’t expect to have a major year-end or quarterly estimated tax liability this year, don’t worry. There are plenty of other ways to earn your new credit card’s sign-up bonus offer: making major travel or home improvement purchases in advance, for instance.
Just remember that credit card use is a privilege, not a right. Don’t put yourself in an uncomfortable – and avoidable – financial pickle just to earn a few extra cash back dollars or summit the final hill in your sign-up bonus climb. You could find yourself stuck with the consequences for years to come.
Have you ever paid your tax bill with a credit card?