You can pay your taxes with a credit card — but should you?

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It's that time of year again: tax season. If you owe taxes, you may wonder if you should pay with a credit card, especially if you can earn cash back or points on the transaction. Paying with a card also offers more flexibility to pay back your tax bill over time.

It’s possible to pay your taxes with a credit card — but is it a good idea? There are some important caveats you should know first. Here’s everything you need to know about putting your tax bill on plastic.

Can I pay taxes with a credit card?

The short answer — yes.

You can pay federal taxes — including federal income taxes and quarterly estimated taxes — with your credit card. You can pay your state and local taxes with a card, depending on where you live.

The IRS accepts credit card payments through third-party payment processors. These processors accept major card issuers like Visa, Mastercard, Discover, and American Express. You can also sometimes pay through a digital wallet, such as PayPal and Venmo.

Depending on the type of tax and the tax year, the IRS limits how many credit card payments you can make. For example, you can make two credit card payments per year for current taxes due. For estimated taxes using Form 1040-ES, you can make two payments per quarter.

While paying taxes by credit card is a convenient option, you’ll likely have to pay a processing fee, around 1%-2% of the total amount.

If you don’t pay your credit card bill and carry a balance, you may face additional interest charges that can add up.

Advantages to paying your taxes with a credit card

While paying your taxes with a card costs extra, there are some potential benefits worth considering:

• Flexibility: Paying taxes with a credit card gives you wiggle room in how you use your money. Charging taxes to a card lets you borrow from the credit issuer and keep your cash free for several more weeks while you wait for the next billing cycle.
• Covers you in case of an emergency: If you forgot your taxes were due or can't pay in full, whipping out the plastic helps you meet the deadline and avoid harsh IRS penalties for late payment.
• Ability to earn rewards: If your credit card offers points or cash back on spending, paying a large tax bill with it could earn you a nice bonus. Just do the math to make sure the rewards outweigh the fees. Most processing fees are under 2%, so your cash back rewards should be worth more to cover fees on the transaction.
• Earn a welcome bonus: Putting a giant tax bill on a new credit card is one way to hit the spending requirement for a welcome bonus quickly.

Disadvantages to paying your taxes with a credit card

There are some downsides to consider when it comes to paying your taxes with a card:

• Fees: While a 2% processing fee doesn’t sound like much, it can add up on a larger tax bill. For example, if you owe $5,000, you’d pay around $100 in processing fees.
• Potentially higher interest: If you don’t pay your credit card bill before your statement date, you’ll owe interest on the balance. Unless you have a 0% APR credit card, your card’s interest rate is likely much higher than what the IRS charges for underpayments (8%).
• Impact to credit score: When you put your taxes on your credit card, you increase your credit utilization ratio, or the percentage of available credit you use. A high credit utilization may signal to lenders you’re struggling with credit, and your credit score may decrease.

How to pay taxes with a credit card

You can pay your taxes by credit card through three IRS-approved processors. Each one charges a different fee:

• payUSAtax: 1.82% with a minimum fee of $2.69
• Pay1040: 1.87% with a minimum fee of $2.50
• ACI Payment Inc: 1.98% with a minimum fee of $2.50

You can also pay taxes using a third-party service like Plastiq, but processing fees are higher.

Paying your taxes online with one of these processors is simple. You’ll choose which tax you’re paying, the tax year, and the amount you want to pay, and provide your credit card details.

The service fees go to the processor, not the IRS, and you can deduct processing fees for business taxes. If you overpay a tax bill, the IRS will refund the amount if you don’t have other federal tax debt due.

Should you pay your taxes on your credit card?

Deciding whether to pay your taxes with a credit card depends on your financial situation. Here are some key questions to ask yourself:

• Can I pay my credit card bill in full? If you cannot pay off the credit card balance in full by the next due date, charging taxes is very risky. The high interest rates on unpaid credit card balances will likely far outweigh any rewards you may earn.
• Can I earn credit card rewards? If your card offers high cash back rates or points, the rewards you earn could offset processing fees.
• Can I avoid damage to my credit score? If putting your entire tax bill on a card would push your credit utilization over 30%, your score may take a hit. Consider spreading payment across multiple cards.
• Can I meet the minimum spending requirement for a bonus? If you have a new card with a lucrative welcome bonus, a tax payment may help you meet the spending requirement.
• Do I have an intro 0% APR card? If you recently opened a card with a 0% introductory APR offer, charging taxes allows you to pay over time without interest if paid off before the period ends.

“To me, the benefit is the flexibility it gives you,” says Matt Hylland, a certified financial planner at Arnold and Mote Wealth Management. “There are a lot of zero-percent credit cards out there, and you can keep your money in a money market account paying over 5%.”

But, you risk high interest rates if you fall behind on your credit card payment. It’s likely not worth the hassle if you don’t think you can manage the card payments.

If you’re struggling to pay your tax bill, using a credit card isn’t a good idea, says Hylland. Instead, contact the IRS about setting up a payment plan.

Alternatives to paying taxes with a credit card

Using a credit card to pay your taxes has some definite risks. Luckily, you have other payment options, including:

• IRS online payment plan: The IRS allows you to set up a payment plan that automatically deducts taxes owed from your bank account over time in fixed installments.
• Personal loans: Banks and credit unions offer installment loans at lower interest rates than credit cards. These can give you funds to pay taxes in full while paying down the loan over a period of time.
• Bank account: There’s no fee for IRS Direct Pay, and you can transfer the funds from your checking or savings account.

The bottom line

Paying your taxes by credit card sounds easy, but the convenience comes with high interest rates on your credit bill if you don’t pay it off. Charging a large tax bill to your credit card can damage your credit score.

If you want to put your taxes on your credit card to earn credit card rewards, ensure the reward will be worth more than the processing fee you’ll pay. Repay the credit card quickly and before any 0% introductory offers expire.

Editorial disclaimer: Opinions expressed are author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.