According to the IRS, the average taxpayer paid $15,322 in income tax in 2018. While many employees have taxes withheld from their paycheck so they don’t have to pay it all in one lump sum, you still might owe some money when tax time rolls around.
Self-employed people, business owners, and freelancers have to be more self-sufficient when it comes to organizing their tax payments.
If you’re stressing about how you’ll pay your taxes next April, you might be wondering: can you pay federal taxes with a credit card?
Let’s take a look at this question and whether or not it’s a good idea.
Can You Pay Federal Taxes With a Credit Card?
You might be surprised to learn that you can, in fact, pay taxes with a credit card. This might seem like an enticing offer, as you’ll get to benefit from the twenty-one-day grace period on the payment that you make. However, there are downsides you’ll want to consider before you go this route.
How Much Does It Cost to Pay Taxes With a Credit Card?
It’s important to understand that it isn’t free to pay taxes with a credit card, while there aren’t any additional costs to paying your taxes using a bank account transfer. This means that you will be charged a fee that amounts to a percentage of your tax payment.
The payment processor that you choose will determine how much you are charged. The breakdown for the fees is as follows:
- PayUSAtax.com: 1.96% fee, minimum $2.69
- OfficialPayments.com/fed: 1.99% fee, minimum $2.50
- Pay1040.com: 1.87% fee, minimum $2.59
The fees are even higher if you choose to use an integrated IRS e-file and e-pay service provider. Here’s how much it costs from different providers:
- Fileonline.1040.com: 2.35% fee, minimum $3.95
- Pay1040.com/SpecialOffers/TurboTax: 2.49% fee, minimum $3.95
- FileYourTaxes.com: 3.93% fee, minimum $2
It’s worth running the numbers and determining whether or not footing these extra fees is worth the convenience of using a credit card to pay taxes.
What Are the Benefits of Paying Taxes With a Credit Card?
You might find that it’s beneficial to you to pay your taxes with a credit card for a number of reasons. Let’s take a look at some of the perks.
Benefit From Special Financing
If you would like some breathing room when it comes to paying your taxes, paying a credit card that has a 0% APR period might be worth looking into. Some cards offer more than a year of special financing on the purchases that you make.
Earn Credit Card Rewards
If your credit card has rewards perks, you can earn points, cash back, or miles when you pay your taxes using a credit card.
This can be tempting, but you’ll want to remember the processing fee associated with using a credit card. You might find that the rewards you are earning aren’t making up for the cost of paying in this way.
Another compelling reason to use a credit card for this purpose is that it’s convenient. It’s fast to pay this way and you can receive confirmation right away that your payment was completed. There will still be the fees, though, and paying with a credit card is only slightly more convenient than using an online bank transfer.
Meet Welcome Bonus Offer Spending Requirements
Sometimes, signing up for a new credit card will come along with an attractive welcome bonus. This might be a card that offers you 60,000 bonus points if you spend $5,000 on purchases in the first five months of having the account, for example. You might find that the perks you receive in this way are worth paying the credit card processing fee.
What Are the Drawbacks?
There are also some things you’ll want to watch out for when it comes to paying for taxes this way. Let’s take a look at the downside.
Interest Charges on Unpaid Balances
You will need to pay your credit card balance in full by the payment due date. Otherwise, you will incur interest charges when you pay your taxes with a credit card.
If you charge your taxes to a credit card account and only make the minimum payment, you are racking up interest charges that could be potentially very costly.
The processing fees are also worth doing the math on. While paying somewhere around 2% to use a credit card might not sound like much, the number can get pretty big when you’re talking about owing thousands of dollars in taxes.
Limitations on the Taxes That Are Eligible
It’s worth noting that there are some limitations to which taxes are eligible for credit card payments. Depending on your particular financial situation, you might find it’s easier to pay all of your taxes using an online bank transfer.
High Credit Utilization Rate
Lastly, it can have a negative impact on your credit score when you pay taxes using a credit card. This is because it can cause your credit utilization rate to spike. This is a rate that explains the total percentage of your credit that you use.
In order to calculate your credit utilization rate, you just need to take your total credit card balance and divide it by the amount of credit you have available. The percentage left over is your credit utilization rate.
If this rate gets too high, it can lower your credit score. This can make it more difficult to borrow money or leave you with less favorable terms when it comes to taking out a loan.
Should You Pay Taxes With a Credit Card?
It will depend on your personal financial situation whether it’s a good idea to pay federal taxes with a credit card. The fees you incur might not make it worth the perks, and if you end up carrying a balance on your credit card that accrues interest you might find yourself in more debt than when you started.
Are you looking for more resources on using credit cards wisely? Check out our library of resources.