As an expert in credit cards and consumer credit, I have to know everything that I can about how to earn rewards for your spending. And as a freelance writer since 2008, I need to pay my taxes directly to the IRS and my state’s Department of Revenue. I don’t have an employer to withhold my taxes. While most people will pay their taxes by mailing in a check, there are some times that it has made sense for me to pay my taxes with a credit card. In fact, doing so is one of the ways that I can take free trips with my credit card rewards.
Table of Contents
- Paying Taxes With a Credit Card
- Advantages of Paying Taxes With a Credit Card
- Drawbacks to Paying Taxes With Credit Cards
- Using a Balance Transfer Credit Card to Pay Your Taxes
Paying Taxes With a Credit Card: The Basics
If we could simply have the IRS charge our taxes to a credit card, with no additional fees, then it would be a no-brainer. We would reap the points, miles or cash back that our favorite reward card offers, at no additional cost. Sadly, that’s not the case.
Instead, the IRS authorizes three different companies to accept credit and debit card payments on its behalf, along with a “convenience fee” to cover the costs that merchants incur when they accept credit cards.
These companies also accept debit cards for flat fees ranging from $2.55 to $3.95 per payment. For more information, see the IRS page on how to pay your taxes by debit or credit card.
Also note that some states allow tax payments by credit card, and some don’t. To make it more confusing, some accept payments directly, and some work with the payment processors used by the IRS. If you want to pay your property taxes with your credit card, it will depend on the policies of the city or county the assesses them.
The Advantages of Paying Taxes With a Credit Card
Despite the fees imposed, there are several good reasons why you may want to pay your taxes with a credit card:
1. Earn rewards. The most common reason people choose to pay taxes with their credit card is to earn rewards, but you have to be sure that what you receive is worth more than the fee. For example, you could make a $10,000 tax payment using the least expensive payment processor, Pay1040, and incur a fee of $187. If your credit card offered you 2% cash back, then you would come out $13 ahead. It’s not a killing, but it’s better than nothing.
More likely is that you’re earning points or miles that are potentially worth much more than 2%. For example, if you used a Chase Freedom Unlimited® or Ink Business Unlimited℠, you would earn 1.5 points per dollar spent, or 15,000 points for your $10,000 payment. If you also had a card like the Chase Sapphire Reserve®, then you’d be able to transfer these rewards to airline miles or hotel points. Then, 15,000 United Airlines miles could be redeemed for a one-way domestic ticket, potentially worth several hundred dollars. Or, you could transfer your rewards to the World of Hyatt program, and book a free night in a Category 4 hotel, which could also be worth several hundred dollars.
2. Meet the minimum spending requirement. Earning a great sign-up bonus typically requires you to meet a minimum spending requirement within a specified time period. For example, you may have to spend $5,000 within three months of account opening to earn a very generous amount of points and miles. If you’re unable to comfortably do so, then it may be worth paying your taxes with a credit card to earn a bonus that’s worth far more than the fees you’ll pay.
3. Enjoy some free float. Most credit card users know that they can avoid interest by paying their statement balance in full, and the savviest ones realize that they can receive up to 55 days of interest-free financing by making a payment at the beginning of their statement period. That gives you approximately 30 days of their statement period, plus 21 or 25 days of grace period before making the payment in full to avoid interest charges.
4. Convenience. Even if you break even on rewards, it can still be easier to enter your credit card online than it is to write a check and stick it in the mail. You’ll also be assured that your payment is received and instantly receive a receipt. But if convenience is your only goal, then you can use a debit card to pay your taxes, and incur a flat fee of just a few dollars.
Bottom line: When you have a large tax bill, it’s always tempting to just charge it, but you should first calculate if it makes sense. By understanding the advantages and drawbacks of paying your taxes with a credit card, you can make the right decision for your needs.
The Drawbacks of Paying Taxes With a Credit Card
1. Paying interest. It’s a terrible idea to finance your tax bill with your credit card. The average credit card has an interest rate of approximately 15% APR, and many are higher. Yet the IRS will offer you a payment plan with a much lower interest rate. If you’re having trouble paying your taxes, don’t just charge it to your credit card. Instead, speak with your accountant or tax advisor about alternatives.
2. Paying fees that cost more than the rewards are worth. Many people value their reward points and miles as higher than what they receive. For example, you might redeem your airline miles for a ticket that would have cost $500, but that might not be its true value. If you had to fly at an inconvenient date or time or take a longer route, then you aren’t getting the full value. And if a discount carrier offers a competing flight for less money, then you could also be overestimating the value of your award seat. Unless you would have paid cash for the exact same reservation, then your award is probably not worth its stated value to you.
Using Balance Transfer Credit Cards to Pay Your Taxes
Big expenses like tax bills can be softened by using a balance transfer credit card. If you’re paying off a bill with a high interest rate, signing up for a new card that offers balance transfer benefits could save you hundreds of dollars in interest payments. Since many cards offer 0% APR for a certain introductory time period, all you have to do is pay off the balance within that time frame to avoid all those hefty interest charges.
Our top-rated balance transfer credit cards even offer sign-up bonuses that can potentially offset your unexpected expense as long as you pay the balance off during the first three months of account opening.
Chase Freedom Unlimited®
Chase Freedom Unlimited is the perfect rewards card to give you just a little extra back for all of those purchases that do not fall into the popular spending categories like dining or groceries. The Freedom Unlimited gives you 1.5 Ultimate Rewards point per dollar spent on everything.
- Annual Fee: $0
- Value: 1.5X points cash back on all purchases
- Sign-Up Bonus: $150 bonus after spending $500 during the first three billing cycles
- Pro: 0% intro APR on balance transfers and purchases for 15 months
- Con: Better cash-back cards for spending in other categories
Blue Cash Everyday® Card
If you’re looking for a cash-back credit card that leaves many of its competitors in the dust, consider American Express’ Blue Cash Everyday Card. It offers deep cash-back rewards at grocery stores, gas stations, online streaming subscriptions and transit services, like tolls, taxis and ride-shares.
- Annual Fee: $0
- Value: 3% cash back at U.S. supermarkets, 2% cash back at U.S. gas stations and some department stores and 1% cash back on everything else
- Sign-Up Bonus: $150 bonus after spending $1,000 during the first three billing cycles
- Pro: 15 months of 0% APR on purchase and balance transfers
- Con: Cash back comes in the form of a statement credit, rather than a check
Bank of America® Cash Rewards Credit Card
The Bank of America Cash Rewards credit card is among the most popular credit cards for people who want a cash-back card without all the bells and whistles of the more complicated premium cards. Not only does the Cash Rewards Card reward you generously with 3% and 2% cash-back options, it doesn’t have an annual fee and even offers an introductory 0% interest rate for the first 15 billing cycles. Read our full review of the Bank of America Cash Rewards credit card.
- Annual Fee: $0
- Value: 3% cash back in rotating categories and 2% cash back at grocery stores
- Sign-Up Offer: $200 after spending $1,000 during the first three billing cycles
- Pro: 15 months of 0% APR for purchases and balance transfers
- Con: Difficult to remember to opt in for rotating categories