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If you owe taxes, you might be wondering if you can pay the IRS with a credit card. More importantly, should you?
It can be tempting to use a credit card to pay off your tax bill – doing so can buy you a little more time, and with the right rewards card, you could earn some serious points or cash back.
However, it can come at a cost. “If you are paying by credit, you will see fees ranging from 1.87 percent to 2 percent,” says Jayson Mullin, founder of Top Tax Defenders.
While those fees may seem small, they could add up to a lot depending on how large your tax bill is. For example, if you have a tax bill of $5,000, a 2 percent fee would equal $100.
Read on to learn about the pros and cons of paying the IRS with your credit card, as well as how to pay the IRS while minimizing credit card fees.
What to consider before paying the IRS with a credit card
If you have a tax liability that you can’t pay in full, using a credit card may not be your best option. With average credit card interest rates being around 16 percent, paying with a credit card could mean additional interest on top of your tax bill. On the other hand, the IRS late payment penalty is 0.5 percent each month of your unpaid taxes — up to 25 percent total.
Another option to consider is an installment plan, which may be a more affordable option than dealing with the fees and potential interest of paying with a credit card.
An installment agreement is a monthly payment plan with the IRS to help pay your tax debt over time. An installment agreement can be a good idea if it will take you longer than 120 days to pay your tax bill. (If you can pay your tax bill in less time, call 1-800-829-1040.)
Keep in mind that you can’t escape fees entirely. As of Jan 1, 2017 the installment agreement fee for making payments by means other than direct debit is $225 ($107 for direct deposit not established through an Online Payment Agreement).
There are limitations.
It’s important to note that you can’t use a credit card for all IRS tax forms — and there may be other limitations as well.
“You cannot use a credit card to pay federal tax deposits or Form 941,” explains Mullin. Also, some tax forms have limits regarding how frequently you can use a credit card. In other words, don’t bank on the fact that you can use a card to pay the IRS for every tax form all the time.
Also, if you have outstanding tax debt, the IRS may issue a federal tax lien against you. Unfortunately, paying the IRS with a credit card won’t immediately release the federal tax lien.
What are the pros and cons of paying the IRS with a credit card?
Before deciding to pay the IRS with a credit card, it’s important to be aware of the pros and cons involved with doing so.
- You can earn rewards or cash back when using a rewards credit card.
- You may have more time to pay off the debt.
- It could allow you to meet spending requirements for a rewards card sign-up bonus.
- Fees may be tax deductible.
- Not all tax forms allow credit card payments.
- There are fees that vary based on the processor.
- Depending on your total credit limits, total credit card balances and tax bill, it could cause a high credit utilization rate, which could negatively affect your credit score.
- Paying with a card may lead to credit card debt and additional interest if the charges are not paid in full by due date.
Using a rewards credit card to pay the IRS
Paying the IRS with a credit card can result in additional fees, but some savvy credit card holders are making back the cost in the form of rewards.
Will Woodard, Certified Financial Planner™ at DareCapital.com paid his taxes with a credit card in order to reap the rewards. For him, the rewards are worth having to pay the fees.
“I put everything possible on my PNC points® Visa® credit card and pay the bill off in full each month,” explains Woodard. “Using one card and paying it off simplifies expense tracking and builds rewards points.”
However, this strategy only works if you pay the bill in full each month. Also, it’s important to understand the rewards structure on your card and how it compares to the fees you may incur. Are you making a profit by using a credit card or are you losing money?
If you do choose to use your credit card, consider a cash back or travel rewards card that offers a high return. Consider Chase Freedom Unlimited®, which offers 1.5% cash back on all purchases and has a 0% intro APR on purchases and balance transfers for the first 15 months from account opening. After that, the APR will be a variable rate of 17.24 - 25.99%. Keep in mind that you’ll have to pay a balance transfer fee of 3% (minimum $5).
How to pay the IRS with a credit card and get the lowest fee possible
If you want to pay the IRS with a credit card, you have a few options. The IRS works with three payment processors that accept credit card payments.
|Payment processor||Fee for credit cards|
|PayUSAtax.com||1.98 percent fee (min. $2.69)|
|Pay1040.com||1.87 percent fee (min. $2.59)|
|OfficialPayments.com/fed||2.00 percent fee (min $2.50)|
To minimize credit card fees, choosing Pay1040.com may be your best bet as they have the lowest fees. Additionally, you’ll want to see if you can deduct the credit card processing fees on your tax return to help reduce the impact.
Unfortunately, there aren’t many other ways to minimize credit card processing fees when paying the IRS. You could consider paying with a debit card, which has flat fees ranging between $2.25 and $3.95 and could be a cheaper alternative. Of course, you won’t reap any rewards, but you also won’t pay higher fees or additional interest.
If you’re facing a tax bill that you’re unable to pay upfront, paying the IRS with plastic may not be the best route.
Because credit cards can have high APRs, “those who choose to pay with a credit card and have to work at making the payments could be making a bad situation even worse,” says Chris Hardy, owner of Paramount Tax and Accounting, LLC. If you have a tax debt that you can’t pay, consider opting for an installment agreement.
For rewards junkies looking to meet sign-up bonus spending requirements, make sure you choose the right payment process to minimize fees.
You’ll want to make sure you’re actually profiting off the payment and not just getting into more debt. Otherwise, you’ll have bigger problems than just a tax bill on your hands.