The deadline for paying your 2020 taxes has now come and gone, after, from the typical April 15 deadline because of the pandemic. At this point, if you haven't yet filed, you'll want to . And, eventually, you'll have to pay your tax bill. When that time comes, if you don't have enough cash on hand -- or you're wondering whether you can earn reward points or miles -- you may consider paying with a credit card.
The Internal Revenue Service does accept payment by credit card, which could be a great option if you can earn cash back or other rewards -- and if you can pay off your balance right away. Otherwise, using a credit card to pay your taxes can be an expensive stopgap. Between the fees (yes, the IRS will charge you to cover its own processing fees) and high credit card interest rates, you're likely better off looking into one of the IRS' installment plans.
Still, there's a case to be made for paying for taxes on credit that starts with doing some math. There are benefits of using a credit card: reward points, miles or cash back. But do they exceed the fees you'll pay to process the transaction? The following is some handy information to help you make that calculation.
How do you pay taxes with a credit card?
You can make your payment directly on the IRS website, with your choice of three different third-party payment processors for a credit or debit card. Each processor charges about 2%, but it's considerably more expensive (between 2.35% and 3.93%) if you use a credit card to file your taxes using an online software package.
The fees are broken down clearly in this chart on the IRS website. You can pay directly by selecting a "make a payment" under the payment processor of your choosing from this page.
Here's another chart the IRS put together and posted to its site to compare the processor fees:
You can also pay by calling the payment processors directly using the numbers listed on the IRS site. The same fees will apply.
The IRS says your transaction is safe and secure, and your information will be used solely to make your payment. And it notes that the agency doesn't see any part of the card service fee, which you can deduct for business taxes.
There are some limits on the number of payments you can make per year --you're limited to two in most cases, and you can use two different credit cards for each payment if you want. If you own a business or are self-employed, you can't use your credit card to make a federal tax deposit.
The benefits of paying your taxes with a credit card
If you're going to pay your taxes with a credit card, you can rack up some bonus rewards points or get cash back. Maybe you've recently opened up a card with a sign-up bonus or welcome offer that requires you to put a certain amount on your card within a specific time frame. Or maybe you have a card that only offers benefits once you reach a particular spending threshold. Charging your taxes could help you get there.
In general, you'll want to make sure your credit card's rewards return rate percentage exceeds the payment processor fee percentage. For example, if you're paying with a credit card using Pay1040.com, the fee is 1.99%, rounded up to 2%. It's only worth charging your taxes if you're using a card with a reward rate that's higher than 2%.
For some, the primary benefit of using a credit card to pay your taxes will be the extra few weeks you'll have to scrape together a payment. But be careful. Note your statement close date and how long you'll have to pay the balance off in full -- because there are some major risks in using a credit card to pay your taxes.
Caution: Don't use a credit card to finance your tax bill
In most cases, it's inadvisable to pay your taxes with a credit card if you'll be unable to pay off the balance right away. In short: Don't use a credit card to finance your taxes, according to Los Angeles CPA Rob Seltzer.
"For those who can't pay their taxes, the IRS charges a lower interest rate than conventional credit cards," he added, referring to the agency's payment plans. If you need more time, you can also look into filing an extension.
The other obvious pitfall is paying more in fees than you'd get back in perks. That's why Seltzer, a dedicated player of the credit card points and miles game, says he never recommends his clients pay taxes via credit card. "The perks that you earn from the points would not equal the cost," said Seltzer, who's vice president of the LA chapter of the California Society of CPAs.
Hence, the unavoidable math calculation. Happy number-crunching.