While no one likes handing over their hard-earned money to the IRS, it’s better than generating substantial interest over time and damaging your financial stability. The most common forms of payment? Paper checks and online deposits to the IRS. But there’s another option: credit cards.
Credit cards can help you pay your taxes on time if you don’t have the money you need in your account, but they also come with various cons. Here’s what you need to know about paying your taxes with a credit card.
The importance of paying taxes on time
After the April 15 filing deadline, your owed balance will begin to accrue interest. You’ll be charged 0.5% of any tax not paid by the due date plus a 1% tax each month until the balance is paid or 25% is reached. These penalties kick in automatically — even if you pay before the end of the month, you’re responsible for the entire monthly charge.
It’s also possible for the IRS to garnish your wages if you don’t pay on time and don’t make any interest payments. In practice, this means you’ll lose a portion of your earnings every month to the IRS until your tax debt is fully paid off. Also worth noting – you can’t declare bankruptcy on unpaid tax debt. Even if you successfully file for bankruptcy for other debts, your balance owing will remain.
Pros of paying taxes with a credit card
While paying your taxes with a credit card may not be the first option that comes to mind, there are potential benefits, including:
- More time to pay — If you can’t cover your balance owing directly from your bank account, paying by credit card means you avoid the interest charged by the IRS. This is especially helpful if you’re waiting on a direct deposit or a check to clear. Use your credit card for breathing room and then pay down your balance ASAP.
- Potentially avoid interest — Speaking of interest, you may be able to avoid it entirely by using a credit card with a 0% introductory rate. Some cards offer this rate for up to 15 months after account opening, or you could apply for a new card that comes with this intro offer.
- Earn points and rewards — If you have a travel rewards, points or cash back card, paying your taxes could mean big bonus earnings. Before banking on this benefit, however, check with your credit provider to ensure paying your taxes is considered a purchase and will generate rewards.
Cons of paying taxes with a credit card
Paying your taxes with a credit card also comes with potential drawbacks, such as:
- Processing fees — The IRS doesn’t process credit card payments directly. Instead, it uses third-party services including Pay1040, payUSAtax and OfficialPayments, each of which comes with a minimum fee for use (around $3) and a one-time interest fee, which is typically just under 2%. You can also pay your taxes with a credit card through popular tax preparation software, but expect to pay at least 2.5% of the total balance as a convenience fee.
- Interest is still an issue — While 0% introductory rates can help bridge the gap between taxes owing and your bank balance, these intro APR offers eventually run out. When that happens, you go back to paying the regular monthly interest rate on your credit card balance. Depending on your card, this could range anywhere from 13% to 20% or more.
- Potential credit problems — If using your card to pay your balance maxes out your credit card, this can negatively affect your credit utilization ratio. Your card issuer, in turn, may consider you a potential risk and raise your interest rate to compensate. This can cause missed payments as interest accrues, leading to credit score damage. Best bet? If you’re planning to pay your taxes with a credit card, always have a payback plan in mind.
Payment agreements with the IRS
If you can’t make your payment in full on-time, you can also apply for a payment agreement with the IRS. There are two options for individual taxpayers:
- Short-term payment plans — These plans require complete repayment of your balance owing in 120 days or less. There’s no setup fee, and applications can be made online, by phone, mail or in-person. Online applications for balances owing that are less than $10,000 are often approved automatically; higher amounts may take a few days to a week for approval. You’re also responsible for all accrued penalties and interest until the balance is paid in full. If your balance owing is less than $25,000, you can pay by direct debit, using the Electronic Federal Tax Payment System (EFTPS) or by credit card.
- Long-term payment plans — These plans pay out your balance owing over more than 120 days using a fixed monthly payment. Applying online comes with a setup fee of $149, while phone, mail and in-person applications cost $225. You’re responsible for all interest and penalties and have the same payment choices listed for the short-term payment plan. While this longer-term option does accrue more interest, it avoids potential wage garnishes and establishes a monthly payment schedule to manage your debt over time.
In a nutshell
When it comes to paying your taxes, you’ve got options. While you’re often best-served paying your balance in full directly from your bank account before April 15, there’s also a case for credit cards. If you have enough to pay the balance but want to take advantage of points or miles bonuses, or if credit cards can act as a stopgap with 0% interest until your finances get back on track, using credit can help avoid late payments while earning extra rewards.