When tax season rolls around, everyone hopes they will get money back from the IRS when they file — but that’s not always the case.
If you owe taxes to the government, you have several options to pay. But even if you’re forking over your hard-earned cash, you can still make that money work for you.
It’s possible to pay taxes with a credit card and earn cash back or travel rewards, but it’s important to do so correctly. That way, you ensure you’re not throwing away money on fees.
Making a tax payment with a credit card
Paying your taxes with a paper check or electronic funds transfer (EFT) is free, making these the cheapest options. If you pay with a credit card, you have to pay fees to a third-party vendor.
But just because there’s a fee doesn’t mean that paying your taxes with a credit card never makes sense. For example, if you’re a travel hacker trying to earn enough miles to reach your next big trip, making your tax payment with a credit card is an excellent way to earn points on a rewards card.
Your taxes can also help you reach big signup bonuses. A few months ago, I signed up for The Business Platinum® Card from American Express. The card offered me 100,000 American Express rewards points, but to earn them I had to spend a whopping $15,000 within 90 days of opening my account (as of March 1, 2017).
I made a giant $14,730 tax payment on my credit card as an estimated tax payment to the IRS. Including the $275 transaction fee, I put $15,005 on the card and earned my bonus.
I haven’t filed my taxes yet, so I don’t actually know how much I may owe. But any extra tax I paid to the IRS will be returned to me as a refund, and I get to keep all 100,000 points — enough for two round-trip flights to Europe.
Where you can pay taxes with a credit card
As of this writing, the cheapest option is Pay1040, which is what I used for my tax payment. This vendor charges a 1.87% fee with a $2.59 minimum charge. The other vendors require similar (but slightly higher) fees: PayUSAtax.com charges 1.98%, and OfficialPayments.com charges 2.00%
Depending on which credit card you use, you could still come out ahead after paying the credit card fee.
If you use a great rewards credit card, you can easily earn 2 cents for every rewards point you accrue. If you do, then it makes sense to pay the 1.87% fee. However, if you won’t get at least 1.87 cents in value from your points, you shouldn’t pay your taxes with your credit card.
Unless you’re earning rewards points on your credit card, it’s rarely a good idea to pay your taxes in this way.
Not only do you pay fees to use a credit card, but you risk paying high interest rates if you don’t pay off that card right away. That can lead to big credit card debt, which can quickly balloon out of control if you aren’t paying attention.
When your taxes are due, you have several options to pay — many of which are free. Here’s a brief outline of other payment methods.
- Electronic payment with eFile: When you eFile your taxes with an approved software like TurboTax or H&R Block, you can enter your bank account information for a payment. This is the easiest method for most people who do their own taxes with tax prep software.
- Paper check: You can mail a check to the IRS with your return if you don’t do your taxes online.
- IRS Direct Pay: IRS Direct Pay is a payment portal that allows you to send funds to the IRS, similar to how a direct deposit or automatic bill payment works. Enter your checking or savings routing and account number and you can pay directly to the IRS online.
- Payment plans: If you can’t afford to pay your taxes right away, it’s possible to get on a payment plan. This may incur additional fees, interest, and charges.
If you’re thinking about charging your taxes to a credit card because you simply don’t have the money, be careful. Click here for more info on what to do if you can’t afford your tax bill.
Can I pay my taxes with a credit card?
It’s certainly possible to pay taxes with a credit card, but you should do the math and compare the cost to the rewards.
I paid $275 in fees to pay my taxes with a credit card, but I will get at least $2,000 in free travel as a result. That was worthwhile in my case, but if I didn’t have a big bonus to reach or a great travel rewards card, I would be better off paying with a free method.
Which one makes the most sense for you? That all depends on your credit cards and your tax bill. Hopefully, you don’t owe anything at all. But if you do, this trick could help you earn rewards on that bill.