If you have an outstanding tax bill, you may consider using your credit card to take care of the balance. With a credit card comes the opportunity to earn rewards or take advantage of an interest-rate promotion. While paying your taxes with a credit card may be a pretty straightforward process, the fees and potential you’ll pay may offset any rewards you earn. Here, we’ll review your options and help you decide whether paying your taxes with a credit card is the best option.
Options When You Can’t Pay Your Taxes Up Front
Not everyone can afford to pay their tax bill at the time they file their returns. Fortunately, you have a few options if you don't have the money available to pay your taxes right away.
- You can pay late. The federal monthly late fee is 0.5% of the balance due.
- You can set up an installment agreement. You’ll pay a one-time fee of up to $149 plus monthly interest depending on how you sign up (online, phone, mail, or in-person) and which payment option you choose. Taxpayers who qualify as “low-income” may not have to pay a one-time fee if they qualify.
- You can pay by credit card. You'd be subject to the minimum payment and interest rate set by your credit card.
The IRS also offers a short-term payment plan if you can repay your tax debt within 120 days. There is no application fee but interest applies until you pay off your balance.
The Pros and Cons of Paying Taxes by Credit Card
More time to pay
You might avoid interest
You may pay more interest
You'll pay a "convenience" fee
You can pay by card only twice a year
It could impact your credit score
Repayment flexibility: Paying by credit card gives you the flexibility to pay off your tax balance over time, based on your credit card terms. Owing your credit card issuer can feel less stressful and intimidating than owing the IRS.
Earning rewards: You can take advantage of rewards or a welcome bonus your credit card offers. A cash-back credit card with a flat-rate rewards structure would be a better option than a card with bonus rewards on specific categories of spending. For example, if you were to pay a $5,000 tax bill with a card that had a 1.5% rewards rate, you’d earn $75 in cash back.
More time to pay: Using a credit card allows you to pay your tax bill beyond the April 15 (May 17 in 2021) deadline without any paperwork or IRS correspondence. This beats the IRS installment-agreement option, which gives you up to six years to pay but requires additional forms and other qualifying rules.
The IRS extended the filing deadline for individual 2020 tax returns to May 17, 2021. You can delay payments until that time as well, without incurring penalties or interest.
You might avoid interest: You might be able to avoid paying any interest if you can take advantage of a credit card with a long 0% introductory rate on purchases. Many rewards credit cards offer anywhere from 12 to 15 months of zero interest on purchases.
You may pay more interest than with other options: Introductory rates notwithstanding, credit card interest rates are typically significantly higher than the rate imposed by the IRS for an installment agreement. And the longer you take to pay your credit card balance, the more you’ll end up paying in interest.
You'll pay a "convenience" fee: IRS-approved payment processors charge a convenience fee from 1.96% to 1.99% as of 2021 when you pay your tax obligation by credit card. The convenience fee for a $10,000 tax bill paid by card would cost $196-$199.
You can pay by card only twice a year: The IRS imposes a limit on credit card payments. You can only use this option twice a year in all but a few scenarios, so it might not be the answer if you have to spread your payment over three or more credit cards.
It could impact your credit score: If your credit utilization shoots up because the tax payment consumes a significant portion of your available credit, your credit score could drop. Your credit utilization is the ratio of your balance to your credit limit and counts for 30% of your credit score.
Weighing Your Late-Tax-Payment Options
Suppose you still owe the IRS $5,000 after accounting for withholding and any estimated tax payments you made during the year. How much will you ultimately pay, depending on the option you choose? The table below and subsequent calculations show you how much each option could cost you:
|Paying Late||Paying by Installment Agreement||Paying by Credit Card|
0.05% on the remaining unpaid tax each month or part of a month following the due date, until the tax is fully paid.
|0.25% per month, as of 2021.||The average interest rate on credit cards was 20.29% as of March 2021.|
|Fees||N/A||Set-up fee of $0 to $149, depending on your income level, how you sign-up for the agreement, and how you make your monthly payments.||1.96% to 1.99% of your payment, as of 2021.|
|Repayment Period||N/A||You can divide your balance up over as many as 72 monthly payments.||You can take as long as you want, but interest charges can be expensive.|
You end up making that payment in October. In a typical year, that's six months late. You'll pay around $151 for a total of $5,151.
Payment by Installment Agreement
Under an installment agreement, your total tax bill after six months would be around $5,155—the initial $5,000, plus the $149 application fee and around $6 in interest at 0.25% over six months.
Using a Credit Card
If you instead put that $5,000 on a credit card, your total tax debt would work out to $5,628 if you commit to paying off the balance in six months. That’s the original $5,000 owed plus a $98 convenience fee (based on a 1.96% convenience fee), plus around $530 in interest, assuming your interest rate is the national average of 20.24%.
Paying by credit card may give you the flexibility to pay your tax debt off over time, but it carries the potential to pay more overall if you take your time paying the balance off. Late credit card payments may affect your credit score, but the IRS doesn't report to the credit bureaus.
Interest accrues on a credit card balance each month. If it takes you longer than six months to pay off the balance, additional finance charges mean you’ll pay more in the long run.
How to Pay Taxes With a Credit Card
To pay your taxes by credit card, choose one of the three payment processors approved by the IRS:
- Pay1040 (1.96% fee)
- PayUSAtax (1.99% fee)
- ACI Payments, Inc. (1.99% fee)
Once you’re on the provider’s website, select the option to pay your taxes, choose your tax year, and provide your payment details.
- The IRS permits you to pay your tax obligation by credit card, subject to a convenience fee.
- You’ll pay more interest if you pay by credit card rather than through an IRS installment agreement.
- Late or missed payments to your credit card lender can result in damage to your credit score, but the IRS doesn’t report installment agreements to the credit bureaus.