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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 bills on credit.
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 cheat sheet from Mastercard for details about individual and business payment portals for state income taxes.
Before we go any further, we should clarify that 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 ($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
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 the same three IRS-approved processors for end-of-year payments, extension payments, and other types of tax payments accompanied by IRS forms.
Official Payments and Pay1040.com both partner with TurboTax. Official Payments offers up to $30 off prep fees, depending on plan selection; Pay1040.com offers up to $15 off TurboTax prep fees, depending on plan selection.
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 are 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: typically, anywhere from 10% APR to 30% 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
Key advantages of paying taxes with a credit card include cash flow benefits, the potential to build credit, and eliminating extension form requirements.
- 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 from top credit card issuers like Citi and Capital One.
- 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 up to $15 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 the Delta SkyMiles Reserve Card from American Express, have even higher spend thresholds for coveted travel loyalty program windfalls. Heavy-spending Delta Reserve cardholders get a windfall of Medallion® Qualification Miles (MQMs) after reaching the card’s five-figure spending threshold.
- 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
Paying taxes with a credit card does have some drawbacks, including processing fees, higher credit card balances and credit utilization ratios, and higher fees for integrated e-file and e-pay providers.
- Carries a Processing Fee of at Least 1.87%. Every IRS-approved credit card payment processor levies a convenience fee. As of the 2020 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 for cardholders who don’t expect tax payments to trigger point or mile windfalls via sign-up bonuses or ongoing spending thresholds.
- 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 (available credit) 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 have interest rates of 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 that are almost certain to exceed your rewards credit card’s cash-back or point-earning rate.
- 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.
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.
Editorial Note: The editorial content on this page is not provided by any bank, credit card issuer, airline, or hotel chain, and has not been reviewed, approved, or otherwise endorsed by any of these entities. Opinions expressed here are the author's alone, not those of the bank, credit card issuer, airline, or hotel chain, and have not been reviewed, approved, or otherwise endorsed by any of these entities.