Should You Pay Your Taxes With a Credit Card?
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 necessary cash on hand immediately.
- You can pay the IRS late. The federal monthly late fee is 0.5% of the balance due. That works out to $50 on each $1,000 of the tax balance you owe.
- You can set up an installment agreement with the IRS for a one-time fee of up to $149 plus monthly interest. It's only $31 if you qualify as a low-income taxpayer, but you have to apply online to receive these rates.
- You can pay by credit card. You'd be subject to the terms and conditions of your credit card agreement in this case.
Make sure you understand the advantages and disadvantages of paying your taxes by credit card if you decide to elect this option, and compare the pros and cons to using an IRS installment plan instead.
The Benefits of Paying Taxes by Credit Card
You'll have flexibility to pay off your tax balance over time, based on your credit card terms, if you use a credit card with a large enough credit limit to pay off your tax bill. Owing your credit card issuer can feel a little less stressful and intimidating than owing the IRS. There are some other benefits to paying your taxes with your credit card as well.
You Can Earn Rewards
Take advantage of the rewards your credit card lender offers, but be wary. Read the fine print of your agreement. Some rewards credit cards have restrictions on the types of purchases and minimum charges you must make before they start rewarding you.
You'll Have More Time
Putting your taxes on your credit card allows you continue to pay your tax bill beyond the April 15 deadline. The IRS offers this option, too. Their installment agreement gives you up to six years to pay, but you have to file additional forms and some other qualifying rules can apply.
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, and if you can pay off the balance before the introductory period ends. But that's a lot of "ifs," so again, proceed with caution.
The Drawbacks of Paying Taxes by Credit Card
Some serious drawbacks exist to paying your taxes by credit card as well.
You'll Pay More Interest
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. Using a low-interest credit card or one with a promotional interest rate will reduce the amount of monthly finance charges you'll pay on the balance.
You'll Pay a "Convenience" Fee
The IRS charges a convenience fee from 1.87% to 1.99% as of 2020 when you pay your tax obligation by credit card. That percentage applies to your tax bill, so the convenience fee would be close to $20 if you owed the IRS $1,000. Putting a $10,000 tax bill on your credit card would cost almost $200.
The more you owe in taxes, the higher your convenience fee will be.
You Can Only Pay This Way Twice a Year
The IRS imposes a limit on credit card payments. You can only use this option twice a year, so it might not be the answer if you can't charge your entire tax debt all at once or in two separate payments because your credit limit won't accommodate the whole balance.
Your Card Issuer Might Decide You're a Risk
Your card issuer might take it as a sign that you're having financial difficulties if you must use your credit card to pay your income tax obligation. Why would you use your credit card if you were solvent enough to have the cash available? Your card issuer might raise your interest rate, lower your credit limit, or even cancel your credit card in extreme cases in response to the perceived risk.
Late Payment vs. Installment Plan vs. Credit Card
From setting your own terms to the interest rate and set-up fees you'll pay, some might say that the IRS offers the better deal if you have to finance your tax debt.
|Paying by Credit Card||Paying by Installment Agreement|
|The average interest rate on credit cards was 15.78% as of the second quarter of 2020.||The interest rate on an IRS installment agreement is .25% per month as of 2020.|
|The IRS convenience fee for paying by credit card is from 1.87% to 1.99% of your tax debt as of 2020.||The IRS charges a set-up fee of $149 for an installment agreement if you apply online.|
|The lender determines your monthly minimum payment that will include any other charges that you've made.||You can divide your balance up over as many as 72 monthly payments.|
Let's say 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?
- You end up making that payment in October, six months late. You'll pay an additional $1,250 for a total of $6,250. The interest rate of .5% or $250 a month for six months works out to $1,500, but the IRS places a cap on a late payment penalty of 25% of your tax debt, which is $1,250.
- That's a lot of money, so you decide to put that $5,000 on a credit card instead. Your total tax debt would work out to at least $9,829 after six months: $5,000 plus a $95 convenience fee (we'll use a 1.9% fee to make this easy), plus $789 a month for six months, or $4,734, assuming your interest rate is the national average 15.78%. And this doesn't even account for your credit card's compounding interest.
- Now let's say that you asked the federal government for an installment agreement, and the IRS said, "Sure, not a problem." Your total tax bill after six months would be just $5,899: that initial $5,000, plus the $149 application fee, plus $125 a month in interest at .25% over six months. And you'll be making payments during this six time, dropping your balance, so the interest portion will actually be less.
Paying by credit card might give you the flexibility to pay your tax debt off over time, but you'd pay less overall if you just ask the IRS for an installment agreement. And any late payments you make will be included on your credit report if you use your credit card. This could affect your ability to get credit cards and loans in the future. Other than actual tax liens, the IRS doesn't report to the credit agencies.
- The IRS permits you to pay your tax obligation by credit card, subject to a convenience fee.
- You’ll pay more in the way of 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.
IRS. "Frequently Asked Questions / Collection Procedural Questions 3." Accessed Oct. 9, 2020.
IRS. "Apply Online for a Payment Plan." Accessed Oct. 9, 2020.
IRS. "Pay Your Taxes by Debit or Credit Card." Accessed Oct. 9, 2020.
IRS. "Frequency Limit Table by Type of Tax Payment." Accessed Oct. 9, 2020.
Consumer Reports. "Consider an IRS Payment Plan If You Can't Pay Your Taxes." Accessed Oct. 10, 2020.
IRS. "Additional Information on Payment Plans." Accessed Oct. 9, 2020.
IRS. "Common Penalties for Individuals." Accessed Oct. 10, 2020.
Board of Governors of the Federal Reserve System. "Consumer Credit - G.19." Accessed Oct. 10, 2020.