As you prepare for tax season, you may consider paying your taxes with a credit card. After all, you’d have some breathing room until the bill was due and could earn rewards.
The issue is that the IRS adds processing fees to credit card payments. On the other hand, if you don’t pay your bill in full and on time, you could be looking at serious interest charges.
Below, CNBC Select reviews the benefits and drawbacks of using a rewards credit card to settle your tax bill.
Can you pay taxes with a credit card?
Yes, you can pay your taxes with a credit card. The real question, is should you?
Unlike paying your taxes with a check or automatic bank transfer, credit card payments come with a processing fee. The fee is a percentage of your tax payment that varies depending on the payment processor you choose.
There is also a maximum number of card payments allowed, based on your tax type and payment type.
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What it costs to pay taxes with a credit card or debit card
There are two IRS-approved third-party payment processors for debit and credit card payments. Each company has different fees:
Pay1040.com
- Credit card fee: 1.75% (minimum $2.50)
- Personal debit card fee: $2.15
- Commercial debit or credit card fee: 2.89% ($2.50 minimum)
- Cards accepted: Visa, Mastercard, Discover, American Express and more
ACI Payments, Inc.
- Credit card fee: 1.85% fee (minimum $2.50)
- Personal debit card fee: $2.10
- Corporate debit or credit card fee: 2.95% ($2.50 minimum)
- Cards accepted: Visa, Mastercard, Discover, American Express and more
Pros of paying taxes with a credit card
Earn credit card rewards
If you use a rewards credit card to pay your taxes, you can earn cash back, points or miles.
For instance, if you owe $1,000 to the IRS and pay it with a credit card through Pay1040.com, you’ll incur a 1.75% fee ($17.50). To recoup that fee and make a profit, you’d need to use a card with a return of more than 1.75% — which you can easily accomplish by earning $20 or more in rewards with a 2% cash-back card or travel credit card that earns 2X on all purchases.
Read on: When it makes sense to pay your taxes with a credit card
A card like the Wells Fargo Active Cash® Card offers unlimited 2% cash rewards on every purchase. After subtracting the 1.75% fee from the rewards, you’d earn a 0.25% profit on your $1,000 tax payment — which is $2.50.
That’s not a big return, but it would be higher if you owe more. Plus, a single tax payment could easily qualify you for this card’s welcome bonus of $200 in bonus cash rewards after spending $500 in purchases in the first three months after opening the account.
Wells Fargo Active Cash® Card
On Wells Fargo’s secure site
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Rewards
Unlimited 2% cash rewards on purchases
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Welcome bonus
Earn a $200 cash rewards bonus after spending $500 in purchases in the first 3 months
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Annual fee
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Intro APR
0% intro APR for 12 months from account opening on purchases and qualifying balance transfers.
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Regular APR
19.24%, 24.24%, or 29.24% Variable APR
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Balance transfer fee
Intro balance transfer fee of 3% for 120 days from account opening, then up to 5%, min: $5
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Foreign transaction fee
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Credit needed
Pros
- High flat-rate return on all purchases
- Intro-APR for purchases and qualifying balance transfers for a year
- No annual fee
- Cell phone insurance
Cons
- Has a foreign transaction fee
- Limited redemption options unless you pair it with a Wells Fargo card that allows point transfers
The Discover it® Cash Back offers an excellent return in a wide range of useful rotating quarterly bonus categories.
- Unique welcome bonus matches the cash back new cardholders earn for the first year
- Generous intro-APR offer applies to purchases and balance transfers
- No annual fee
- Cash-back categories must be activated each quarter
- Bonus cash back is capped, then you’ll earn 1% back
Highlights shown here are provided by the issuer and have not been reviewed by CNBC Select’s editorial staff.
Highlights
- Intro Offer: Unlimited Cashback Match for all new cardmembers–only from Discover. Discover will automatically match all the cash back you’ve earned at the end of your first year! There’s no minimum spending or maximum rewards. You could turn $150 cash back into $300.
- Earn 5% cash back on everyday purchases at different places you shop each quarter like grocery stores, restaurants, gas stations, and more, up to the quarterly maximum when you activate. Plus, earn unlimited 1% cash back on all other purchases.
- Redeem your rewards for cash at any time.
- Apply and you could get a decision in as little as 60 seconds. No annual fee.
- Start shopping and earning rewards in minutes with our digital card, before your physical card arrives in the mail, if eligible.
- Discover could help you reduce exposure of your personal information online by helping you remove it from select people-search sites that could sell your data. Activate by mobile app for free.
- Get a 0% intro APR for 15 months on purchases. Then 18.24% to 27.24% Standard Variable Purchase APR applies, based on credit worthiness.
- Terms and conditions apply.
Balance transfer fee
3% intro balance transfer fee, up to 5% fee on future balance transfers (see terms)*
Discover will also automatically match all the cash back you’ve earned at the end of your first year. This card earns 1% back on spending that falls outside of its rotating 5% back bonus categories on up to $1,500 in combined purchases after you activate the bonus every quarter (then 1%). With the welcome offer, you’d effectively earn 2% back on tax payments you make in the first year.
Meet spending requirements for welcome bonus offers
If you open a new credit card with a welcome bonus, charging taxes to your card can help you meet the spending requirement. Before using a credit card, however, do the math to see if the bonus outweighs the IRS’s processing fee.
The Chase Sapphire Reserve® has a welcome bonus offer of 60,000 bonus points after you spend $4,000 on purchases in the first three months from account opening. If you charge $4,000 in taxes on the card using Pay1040.com, you’ll incur a processing fee of $70. Considering the bonus is worth $900 in travel when you redeem through Chase Travel℠, it may be worth it.
The Chase Sapphire Reserve® is a standout premium credit card with plenty of luxury perks and statement credits to justify its annual fee.
- Access to 1,300+ airport lounges worldwide, including Sapphire Lounge by The Club locations
- Up to $300 in annual travel credit
- You can transfer rewards to all of Chase’s travel partners including World of Hyatt, Southwest Rapid Rewards and many more
- Top-tier travel and shopping protections
- High annual fee
- Requires a high credit score
Highlights
Highlights shown here are provided by the issuer and have not been reviewed by CNBC Select’s editorial staff.
- Earn 60,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening.
- $300 Annual Travel Credit as reimbursement for travel purchases charged to your card each account anniversary year.
- Earn 5x total points on flights and 10x total points on hotels and car rentals when you purchase travel through Chase Travel℠ immediately after the first $300 is spent on travel purchases annually. Earn 3x points on other travel and dining & 1 point per $1 spent on all other purchases
- Get 50% more value when you redeem your points for travel through Chase Travel℠. For example, 60,000 points are worth $900 toward travel.
- 1:1 point transfer to leading airline and hotel loyalty programs
- Access to 1,300+ airport lounges worldwide after an easy, one-time enrollment in Priority Pass™ Select and up to $120 application fee credit every four years for Global Entry, NEXUS, or TSA PreCheck®
- Count on Trip Cancellation/Interruption Insurance, Auto Rental Coverage, Lost Luggage Insurance and more.
- Member FDIC
Balance transfer fee
Either $5 or 5% of the amount of each balance transfer, whichever is greater
Cons of paying taxes with a credit card
Processing fees
Credit card tax payments are charged a processing fee. This fee doesn’t count toward the taxes you owe to the IRS, and the amount varies on the payment processor you choose.
If you pay with a credit card with rewards that don’t outweigh the fee, using a credit card typically doesn’t make sense.
Interest on unpaid balances
If you use a credit card to pay taxes, it’s key to pay your balance in full by the due date. Otherwise, you risk paying significant interest charges and even damaging your credit.
More help: Can’t pay your taxes? Here are your options
High credit utilization rate
Paying taxes with a credit card can also hurt your credit score by spiking your credit utilization rate.
To calculate your credit utilization ratio, divide your total credit card balances by your total available credit. If you have two cards with a combined balance of $2,000 and a total credit limit of $10,000, your utilization rate is 20%. Adding a $2,000 tax payment would increase your utilization rate to 40%, which is high.
FAQs
Can I use a credit card to pay my taxes?
You can use a credit card to pay your taxes, but you’ll pay a fee for the privilege. Before you go this route, consider whether the rewards you’ll earn are worth it and be sure you can continue to pay your card balance off in full each month.
Does paying your taxes with a credit card affect your credit score?
Paying your taxes with a credit card will not directly affect your credit score. However, your overall debt and credit utilization ratio will impact your credit score. If you pay your taxes with a card and don’t pay the card balance off that can hurt your credit score.
What is the best type of credit card to use when paying your taxes?
The best type of credit card to use for paying taxes depends on what type of credit card rewards you prefer to earn. A cash-back card that earns 2% back on all purchases is always a good option. A travel card that earns transferrable rewards could be more valuable if you know how to get the most value from the points or miles.
Bottom line
If your credit card’s rewards or welcome bonus offer outweighs the IRS’s processing fee, paying your taxes with a card may be worthwhile.
But if the fees are greater than the rewards or you’re not sure you can pay the card balance in full by the due date, stick to one of the free tax payment options, such as a bank transfer.
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For rates and fees of the Discover it® Cash Back, click here.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
