If you have a credit card, you may have wondered if you can pay taxes with it. While it is possible to pay taxes with a credit card, it will not be free. On the other hand, you can potentially take advantage of benefits such as earning rewards or going over your credit card spending threshold to receive a welcome bonus.
Read on to learn more about paying the IRS with a credit card, from the potential benefits to a full rundown of the fees you may face.
Can I pay taxes with a credit card?
If you owe money to the IRS for taxes, you have several payment options, including credit card payment. The IRS allows you to pay taxes with a credit card through a third party payment processor. However, companies that are allowed to accept credit card payments on behalf of the IRS will charge a fee for credit card payments.
Therefore, it is important to carefully consider the benefits of paying taxes with a credit card to decide if you should pay these fees. And always make sure you have a full understanding credit card terminology before using a credit card.
What are the benefits of paying taxes with a credit card?
There are several major advantages to paying taxes with a credit card instead of paying by check, direct deposit, or money order. This includes receiving rewards from your credit card, claiming a welcome bonus, or exceeding a credit card spending threshold to qualify for a bonus. Some taxpayers may also wish to use a credit card to fund their payment, either by using their credit card’s interest-free grace period or by extending the payment.
1. Rewards: Travel Rewards, Points, Cashback
One of the biggest benefits of paying taxes with a credit card is the ability to receive travel rewards or cash back from a credit card. Even with credit card processing fees, some of the best reward credit cards may offer a reward that can offset the cost of the commission. For example, with a 2% credit card fee, you would like to select a card or cards that offer more than 2% cash back or a reward equivalent.
2. Welcome bonus
With a large tax bill, you can get a valuable welcome bonus for a new account on one or more credit card offers. These welcome bonuses can be as high as $1,000 and even secured credit cards can offer them. If these offers cost you more than the 2% credit card fee, you can easily pay your taxes with a credit card.
Some of the highest welcome bonus offers have large minimum spend requirements to claim these bonuses. If you are otherwise unable to cover these minimum expenses, paying taxes may be the way to pay for much or all of this amount. Depending on how big your tax bill is, you can even split your tax payment across two reward credit cards to earn more than one welcome bonus.
However, if you make progress in this direction, just make sure you have a solid understanding of how credit card payments work so you don’t end up in debt.
3. Reach your card spending threshold
Some credit cards have additional spending thresholds beyond those required to qualify for the welcome bonus. This may be another reason to use a credit card to pay taxes. For example, these spending thresholds can help you reach the next level of elite status in an airline or hotel loyalty program. Or, by spending a certain amount, you can receive a free night’s stay certificate or a companion flight certificate.
You will need to weigh whether the status or other benefit is worth the credit card fees you incur when paying taxes with the card. Adding debt to your card, for example, when you do not have the funds to repay, will not improve your credit score.
What payment systems does the IRS use?
The IRS allows three companies to process credit card payments for federal taxes: ACI Payments, Inc., Pay1040, and payUSAtax. Each company charges different fees and accepts different payments, although all three accept Visa, Mastercard, Discover, and American Express.
More information about these companies can be found at tax service website.
IRS Fees for Credit Card Tax Payments
As mentioned above, the three payment systems accepted by the IRS charge different fees for credit card payments, which are shown in the table below:
| ACI Payments, Inc. | Pay1040 | payUSatax | |
|---|---|---|---|
| Credit card fee | 1.98% (minimum commission $2.50) | 1.87% (minimum commission $2.50) | 1.96% (minimum commission $2.69) |
Depending on the type of tax payment by credit card, you can pay a maximum number of times per year. In addition, tax payments over $100,000 may have special requirements and must be processed over the phone and not online.
When deciding whether to pay taxes with a credit card, it’s important to weigh the pros and cons. While you may reap the benefits, you may also face high costs.
| Benefits of paying taxes with a credit card | Cons of Paying Taxes with a Credit Card |
|---|---|
| Get rewards, points, miles or get money back for spent funds | Credit card fee |
| Get extra time to pay your taxes, especially when using the 0% APR offer card. | High interest rates on credit cards can hurt your finances |
| Respect the spending threshold | Getting into debt can damage your credit history |
| Complete the minimum to receive the welcome bonus |
When to Consider Using a Credit Card to Pay Your Taxes
There are several reasons to consider using a credit card to pay taxes. As mentioned, one of the most popular reasons is to receive rewards from your credit card, including trip rewards, points, or cash back. This may also include receiving a credit card welcome bonus or reaching a minimum spending threshold with a card that unlocks new membership levels or special privileges.
If you need more time to pay your taxes, you can apply for an extension with the IRS or set up a payment plan. However, you can expect to pay renewal fees and interest on the payment plan. Instead, you can pay your taxes with a credit card that offers 0% APR to give yourself more time to pay taxes. You will still have to pay a credit card processing fee, but this may be a cheaper option.
This can also be handy if you have other debts that you can transfer to the card through credit card consolidation. Just be sure to pay off the balance in full before the end of the promotional period to avoid paying high interest.
Ultimately, it’s important to fully understand how cards work and how credit card payments work before using a credit card to make a large and important payment such as taxes. And it’s always a good habit to regularly view credit card statementespecially after taxes to make sure the deal went right.
This post originally appeared on Lantern by SoFi. The advice provided on this website is general in nature and does not address your specific goals, financial situation or needs. You should always consider their appropriateness given your own circumstances.