Taxes are inevitable, whether you’re employed at a company or the owner of a small business. Self-employed individuals, such as freelancers, often have to make quarterly estimated tax payments to the IRS if they anticipate owing federal income taxes totaling $1,000 or more.
When tax due dates come around, you can choose from various payment methods, such as directly from your bank account. Though paying your taxes with a credit card is possible, there are advantages and downsides to taking this payment route.
Which tax payment methods does the IRS accept?
The federal government offers multiple quick and convenient ways to make tax payments. In addition to paying with cash, the IRS allows taxpayers to take advantage of several payment methods, including:
- Credit and debit card
- Digital wallet
- Cashier’s check, money order, or conventional check
- International wire transfer
- Direct pay, or an automated clearing house (ACH) transfer, via a domestic bank account
The approved digital wallet options include PayPal and Click to Pay. To learn more about each avenue to make tax payments, visit the IRS website for dedicated pages with detailed instructions.
How to pay your federal taxes using a credit card
Contracting third-party payment processors, the IRS provides a secure avenue for individuals and businesses to pay taxes with a credit card. For any overpayments, the federal government will process a refund. Special terms may apply when using a card to pay a bill amounting to $100,000 or more.
Taxpayers can make their card payments over the phone or online through one of the payment processors’ websites. At the time of this writing, the federal government has authorized three payment processors to collect taxes. These third parties charge a service fee for credit card payments, as follows:
- ACI Payments, Inc. carries a credit card fee of 1.98 percent, with a $2.50 minimum.
- Pay1040 has a credit card fee of 1.87 percent, with a $2.50 minimum.
- payUSAtax adds a credit card fee of 1.96 percent, with a $2.69 minimum.
The IRS permits business taxpayers to write off the card processing fees as a tax deduction. Payment processors take cards from Visa, American Express, Mastercard, and Discover, among the major credit card networks. They can also process digital wallet payments from Click to Pay, though only ACI Payments, Inc. and payUSAtax accept PayPal.
Self-employed individuals like independent contractors and freelancers usually have to pay quarterly taxes in the form of estimated tax payments. The payment due date tends to land on the 15th of April, June, September, and January of the subsequent year. However, if the tax payment is due on a legal holiday or weekend, there is no late penalty fee for making the payment the following business day.
Can you make payments on state taxes with a credit card?
Each state has its own set of guidelines regarding tax payment methods. Individuals and businesses residing within a particular state can check if paying by credit card is possible by visiting their local tax board’s website. Occasionally, a state may not allow credit card payments for certain types of taxes.
A case study: the State of California Franchise Tax Board
For example, the State of California Franchise Tax Board lets taxpayers make payments with a credit card, a 2.3% convenience fee, or a bank account. It works with the third-party payment processor ACI Payments, Inc.
For individuals, the state only processes transactions by credit card for estimated taxes, extensions, tax returns for the current year, and particular bills or other balances that are due. California will not take credit card payments from individual taxpayers for returns filed in previous years.
On the contrary, except for sole proprietorships, businesses can use a credit card to make payments on additional items like an amended tax return, Secretary of State (SOS) certification penalty, pending audit, and proposed assessment.
What are the benefits of paying the IRS with a credit card?
There are several notable perks to using a credit card to make tax payments, with convenience arguably the most significant advantage. Paying the IRS online with a credit card is fast and easy, especially since it requires filling out your contact information, social security number, payment amount, and card details. It’s a completely paperless process that takes around 10 minutes or less.
Based on the type of credit card they’re using, taxpayers can earn cash back, points, or rewards when making a tax payment. Plus, paying taxes often counts toward the minimum spend for many credit card signup bonuses. If, for instance, a credit card offers a cash back rate of 2 percent on all purchases, paying off $10,000 in taxes can result in at least $200 cash back.
Depending on your chosen payment processor and its service charge for credit cards, the cashback can also accrue on the fee. With ACI Payments, Inc., the credit card fee is 1.98 percent, so the service charge on the $10,000 tax payment would add up to $198. The previously mentioned credit card could earn about $3.96 on the fee, so the total cashback is $203.96.
Should you use a credit card to pay your taxes?
Each third-party payment processor authorized by the IRS charges a service fee for credit card payments. This fee can quickly add up to hundreds of dollars for larger tax payments. It may not be worth it for taxpayers earning less than 2 percent in points, cash back, or rewards on their transactions.
However, the situation could be different concerning cardholders working toward reaching a minimum spend amount to gain a signup bonus on their credit card. For example, if a credit card offer requires you to spend a minimum of $5,000 within three months of opening your account for 100,000 points, which has a cash value of $1,000, then it could make sense to pay your taxes with your card to achieve the minimum spend.
Paying off your statement balance in full each month is essential to avoid accruing interest and carrying credit card debt. Though it’s easy to garner rewards on your credit card by making tax payments, your card’s high-interest rates will likely offset your earnings.
Another reason to make tax payments with a credit card is if you lack sufficient funds in your bank account or digital wallet in the short term. When your income is not deposited into your bank account until the end of the month, but your tax due date lands on the 15th, you may pay by the deadline with a credit card to avoid late penalty fees. When collecting your paycheck at the month’s end, you can pay off your credit card balance before the statement is due.
Does the IRS extend a payment plan to taxpayers?
The credit card route for paying taxes is not for everyone, though. Fortunately, the IRS provides a payment plan and an installment agreement option for qualified individuals and businesses who require assistance paying their taxes. This allows taxpayers to pay their taxes over a fixed period, such as month to month or 180 days.
An independent contractor or sole proprietor can be considered for a payment plan as an individual rather than a business. For a business to qualify for the payment plan, it has to have filed all required returns and owe no more than $25,000 after factoring in penalty fees, interest charges, and tax.
Which credit cards offer cash back rewards for tax payments?
Choosing the best credit card depends on your lifestyle and spending habits. Credit cards usually boast a variable rate between 1 to 5 percent in cash back for different categories, such as restaurants, gas stations, and grocery stores. Sometimes the types change each quarter in a calendar year, so you may be unable to optimize your cash back rates every month.
With Vital, you can maximize your cashback earnings. Vital cash rewards are top-tier and compatible with digital wallets such as Google Wallet, Apple Pay, and Samsung Wallet. The rewards program offers 1.5 percent cash back for cardholders who make purchases or payments on bills or taxes, with the potential to get up to 3 percent in cashback rewards for referrals for.3-month periods.
Find out more about the perks of Vital cash rewards and how you can take your cash back earnings to the next level.
Sources
“Estimated Taxes" | Internal Revenue Service
“Pay With Cash at a Retail Partner" | Internal Revenue Service
“Foreign Electronic Transfers” | Internal Revenue Service
“Apply Online for a Payment Plan” | Internal Revenue Service
Vital Card blog posts are intended for informational purposes only and should not be considered financial or any other type of advice.
Vital World Elite Mastercard is issued by Patriot Bank, N.A., Member FDIC, pursuant to license by Mastercard International Incorporated.