You can pay your taxes with credit card, but should you?
If you don’t have the money to pay your taxes in full by the April deadline, putting what you owe on a credit card is certainly an option. Whether it’s a good option is another matter.
For one thing, you’ll have to pay an extra fee to use a credit card. That fee will probably be high enough to wipe out any credit card rewards you’d earn. And if you carry the balance on your card, you’ll be charged interest — probably at a higher rate than you’d pay if you had worked out an installment plan with the IRS.
However, paying the IRS with your credit card could work in your favor in a couple of situations: when it helps you earn a sign-up bonus or when you use a 0% interest card.
You’ll have to pay processing fees
When you pay taxes with a credit card, it will cost you more than if you paid by check.
Whenever you pay for anything with a credit card, there’s a processing fee, usually 2% to 3% of the amount charged. These fees are mostly invisible to you, because the merchant pays them. If you buy something for $10, for example, the merchant may get only $9.70.
The IRS, however, is barred by law from paying credit card processing fees. If the IRS won’t pay, who will? You.
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The IRS has authorized several companies to accept tax payments by credit card; each of these companies adds a “convenience fee” on top of your tax bill to cover processing costs. Those fees range from 1.87% to 2.25%. If you use tax software with an integrated e-file or e-pay option, the fee ranges from 2.35% to 3.93%. TurboTax, for example, has a convenience fee of 2.49%.
Not a rewarding experience
Convenience fees are bad news if you’re hoping to earn rewards by putting a big tax payment on a credit card. To come out ahead, your rewards rate would have to exceed the fee. That’s unlikely. Rewards credit cards typically earn points, miles or cash back at a rate of 1% to 2%. Many cards offer higher rates in bonus categories — but don’t expect “tax payments” to be a bonus category on any card.
But if you have a new credit card that offers a sign-up bonus, a tax payment might come out in your favor. Several travel credit cards offer bonuses worth hundreds of dollars if you charge a certain amount on the card in the first few months. Say your card offers a bonus worth $400 if you spend $3,000. If you make a $3,000 tax payment and pay a 2.5% convenience fee, you’ll come out $325 ahead: $400 minus a $75 fee.
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Of course, this doesn’t take into account credit card interest. Unless you plan to pay off the charge in full on your next statement, interest will change the calculation significantly.
The effects of interest
Most taxpayers who can’t pay what they owe are eligible to set up an installment plan with the IRS, as long as they have filed their return. There’s a setup fee of $52 to have payments taken out of your bank account. While you’re paying off your tax debt, you’re charged interest and a late-payment penalty on the unpaid portion. The current interest rate is 3%, and the late penalty is 0.25% per month — for a combined effective rate of about 7% a year. That’s well below the interest you’d pay on most credit cards. According to the Federal Reserve, the average interest rate on revolving credit card balances last year was about twice that.
However, if you have good to excellent credit, you may be able to do better. A card with a 0% introductory APR would give you a year or more to pay off your tax debt without any interest at all.
Suppose you have a $3,000 tax bill that you’ll need 12 months to pay off, and your options are to set up an IRS installment plan, pay the tax with a credit card with a 15% APR, or put the tax on a new 0% APR card (assuming a 2.5% convenience fee). Compare the costs:
●Installment plan: Setup fee: $52. Total interest and penalties: $98. Total cost: $150.
●15% APR card: Convenience fee: $75. Total interest paid: $249. Total cost: $324.
●0% APR card: Convenience fee: $75. Total interest paid: $0. Total cost: $75.
The interest rate the IRS is currently charging can’t fall lower than 3% under the formula set by law, so it is as low as it will ever get. As rates rise, the savings from using a 0% APR card will grow.
The bottom line
If you have the money to pay your tax bill, it’s probably best to just do so and get on with your life. Using a credit card just isn’t worth the hassle or the expense for most people. That said, if you need time to pay what you owe, a card with a 0% APR period could save you money.
MORE: Best 0% and low-interest credit cards
MORE:Best credit card sign-up bonus offers
MORE:Preparing and filing taxes online
Paul Soucy is an assigning editor atNerdWallet, a personal finance website. Email:paul@nerdwallet.com. Twitter:@paulsoucy.
NerdWallet is a USA TODAY content partner providing general news, commentary and coverage from around the Web. Its content is produced independently of USA TODAY.
See Terms of Credit, "accounts assessed interest," 2015