Wondering about the different ways you can pay your tax bill as an individual or business owner? Good news — if you don’t want to pay out of pocket, you may be able to use a credit card. However, it’s not always the most cost-effective solution. Mike Dion, senior finance manager at Disney and founder of F9Finance says, “Paying taxes with a credit card is usually not the best bet. It may come with hefty convenience fees and potential interest costs, depending on what kind of credit card you use.”.
Here’s a closer look at how paying taxes with credit cards works, the pros and cons, alternatives, and when it can make sense.
Can you pay federal taxes with a credit card?
Americans can pay most federal taxes with credit cards, although the Internal Revenue Service (IRS) limits the number of payments you can make. For example, individuals who file Form 1040 are only allowed to make two credit card, debit card, or cash payments per year toward their current tax due. You can learn more about the limits on the IRS Frequency Limit Table.
However, not all federal taxes can be paid with a credit card. Employment taxes — including withheld employee federal income taxes, employee and employer social security and Medicare taxes, and withheld Additional Medicare taxes — must be deposited via an electronic transfer from a bank account.
Can you pay state taxes with a credit card?
Many states allow you to pay taxes with a credit card. However, the costs and eligible tax types vary. In Arizona, for example, you can use a credit card to pay individual income tax and small business income tax, but will have to pay a 2.35% convenience fee to do so. To find out the requirements in your state, check with your state’s Department of Revenue Services (or similar agency).
How do you pay taxes with a credit card?
To make a federal tax payment with a credit card, you’ll need to use one of the third-party payment processors that partner with the IRS. The three options are ACI Payments Inc., Pay 1040, and payUSAtax. Before choosing one, be sure to check their accepted payment methods and processing fees (see the charts in the next section).
If you need to make a payment of $1 million or more, you’ll need to coordinate with the following service providers:
- For payments over $1 million, call WorldPay US, Inc. at 855-508-0159 or ACI Payments, Inc. at 888-889-7228.
- For payments of $10 million or more, call the Link2Gov Corporation at 866-734-8212.
Is there a fee for using a credit card to pay taxes?
Fees will apply when you pay federal taxes with credit cards. Here’s the cost breakdown.
Processing fees for federal tax credit card payments
|Payment Amount||payUSAtax Credit Fee||Pay1040 Credit Fee||ACI Payments, Inc. Credit Fee|
Expert Tip: The fees above are charged by the payment processors and do not go to the IRS. As a result, they are tax deductible for business owners.
Additionally, here are the different payment types accepted by each third-party payment processor.
|Payment Types Accepted|
|payUSAtax Credit Fee||Visa, Mastercard, Discover, American Express, STAR, Pulse, NYCE, Accel; PayPal, Click to Pay|
|Pay1040 Credit Fee||Visa, Mastercard, Discover, American Express, STAR, Pulse, NYCE, Accel, AFFN, Cirrus, Interlink, Jeanie, Shazam, Maestro; Click to Pay; PayPal; Pay With Cash|
|ACI Payments, Inc. Credit Fee||Visa, Mastercard, Discover, American Express, STAR, Pulse, NYCE; PayPal, Click to Pay; Pay With Cash|
What do you need to pay taxes with a credit card?
When you go to make a credit card payment to the IRS, you’ll generally need to have the following information ready.
- Entity type: Business entity or individual.
- Tax type to pay: Current tax return, prior year tax return, installment agreement, estimated tax payment, etc.
- Tax year: The tax year for the payment you are making.
- Taxpayer information: Name, address, SSN or EIN, and birthdate.
- Taxpayer contact information: Email, phone number, and address.
- Payment amount: The amount you want to pay.
- Credit card details: Cardholder name, card number, expiration date, CVV, and billing zip code.
With all of the above in hand, you should be able to process your credit card payment.
The benefits of paying taxes with a credit card
When considering using a credit card to pay your taxes, there are a few potential perks.
Keep Uncle Sam off your back
If you don’t pay your tax bill when it’s due, interest will accrue and collection attempts will begin — which can be stressful.
The current IRS underpayment interest rate is 7% and the Failure to Pay penalty is 0.5% of the unpaid tax amount per month (up to 25% of the amount owed). Interest compounds daily on your unpaid balance, previously accrued interest, and penalties. Additionally, the IRS sends notices when payments are late and has far-reaching power when it comes to collections.
While the average interest rate on credit cards is much higher than 7% (currently 20%), an outstanding balance on a credit card won’t be a delinquent balance unless you miss a payment. As a result, you won’t have to worry about collection actions like levies.
Note: You can halt collection attempts by entering into a payment agreement of some type with the IRS (more on that below).
Paying with a credit card could also be helpful in a very short-term cash crunch. “If you are waiting on invoices to process and you need to pay the IRS by a specific date and would incur a late fee or penalty otherwise, using your credit card could help you meet the deadline without incurring those fees,” explains Dion.
If you have a rewards credit card, paying your tax bill with the card may help you rack up miles, points, or cash back. For example, the Chase Freedom Unlimited card offers 3% cash back on purchases up to $20,000 in the first year. If you paid a tax bill of $10,000 with that card in the first year, you could earn a quick $300.
However, there are a few caveats. Credit card processing fees are going to cost you 1.85% to 1.98%, which would negate $185 to $198 of your rewards in the example above. Additionally, to avoid interest that further eats away at your net rewards, you’d need to pay off the card balance before the start of the next billing period.
All that said, if your rewards rate is higher than the processing fee, then it could be worth considering!
Avoid interest with 0% intro APR promos
What if you want to use a credit card to pay your taxes but can’t pay off the balance right away? Look for a credit card with a 0% APR introductory period. Many card providers aim to entice new cardholders by offering introductory interest-free periods on purchases.
If you can get a card with one of these promos and a high enough credit limit, it can be a great way to gain more time to pay off your tax bill without worrying about interest charges. However, you’ll usually need good credit to qualify, and great credit to get a high credit limit.
Important: Take note of the normal interest rate that applies once the promotional period ends, and if it’s retroactive on any outstanding balances. If you can’t pay off the balance in time, you could face significant interest charges.
Best credit cards with 0% APR offers
Interested in going the 0% intro APR route? Here are a few options to consider:
- BankAmericard (personal): 21-month 0% intro APR on purchases and qualifying balance transfers, then 15.74 to 25.74% APR.
- Wells Fargo Reflect Card (personal): Up to 21-month 0% intro APR on purchases and qualifying balance transfers, then 17.74 to 29.74% APR.
- Blue Business Plus Credit Card from American Express (business): 12-month 0% intro APR on purchases, then 17.99 to 25.99% APR.
- Chase Ink Business Unlimited Credit Card (business): 12-month 0% intro APR on purchases, then 17.99 to 23.99% APR.
Note that it’s best to keep business and personal finances separate to avoid confusion and prevent issues like piercing the corporate veil. If you do choose to move forward with paying your business taxes with a personal credit card, you should look into expensing the cost to the business, or otherwise making it right on your books.
The drawbacks of paying taxes with a credit card
Now that you know the potential advantages of using a credit card to pay your taxes, here are some of the disadvantages.
Expensive processing fees
When you pay your tax bill using a credit card, you’ll face processing fees that can get pretty expensive — especially if you have a balance on the higher end. For example, if you use ACI Payments Inc. to make a $100 payment, the fee is only $2.50. However, you’ll pay $198 on a $10,000 payment.
These fees can negate the rewards earned on many credit cards and are more than the $0 the IRS charges to pay via an electronic funds withdrawal or check. That said, your bank may charge fees for electronic funds withdrawals, so be sure to check.
High normal APRs
The average credit card interest rate in the U.S. is 20%, as of April 2023, although it’s not unusual to see APRs in the 25% to 30% ballpark. As a result, if you plan to carry your tax balance on a credit card for more than a month, you’re likely going to be accruing a significant amount of interest.
For example, say you use a credit card with a 20% APR to pay off a $10,000 balance. If you paid $200 per month, it would take you 106 months to pay off the balance and would end up costing you approximately $21,005 — $11,005 in interest on top of the $10,000 balance. Ouch!
High credit card balances hurt your credit
Another potential drawback is the impact that a high credit card balance can have on your credit scores. If you decide to use a credit card to pay off a tax bill and carry the balance, you’ll likely see your credit scores drop.
Why? The amount of debt you owe is the second largest factor in most credit scoring models, only second to your payment history. Scoring algorithms look at the total amount of credit you have available compared to the amount you’ve used. The lower the amount you’ve used on an ongoing basis, the better your scores.
Pro Tip: The general rule of thumb is to keep your card balances at or below 30% of your credit limits.
6 alternatives to using a credit card to pay your taxes
If you’re having second thoughts about using a credit card to pay your taxes, you may want to consider these six alternative payment options.
1. Direct Pay
Direct Pay is a way for individuals (not businesses) to pay their individual federal tax balances for free. You don’t have to register and can arrange for payments to come directly out of your checking or savings account.
2. Debit cards
If you have the funds available to pay your individual or business taxes, paying with a debit card will help you save on the processing fees. With both payUSAtax and ACI Payments Inc., debit card payments cost a flat $2.20 instead of a percentage of your payment amount.
3. Digital wallets
The IRS also allows individuals and businesses to pay their taxes using digital wallets like PayPal. To do so, you’ll go through the same payment processors that process credit and debit card payments and will encounter similar fees. For example, with ACI Payments, a 1.98% fee is charged to process federal tax payments from PayPal digital wallets, and there’s a minimum fee amount of $2.50.
4. The Electronic Federal Tax Payment System (EFTPS)
The EFTPS is a free payment service provided by the U.S. Department of Treasury for individual and business taxpayers. To use the system, you need to enroll and confirm a PIN sent by mail. Once registered, you can make tax payments quickly from a checking or savings account.
5. IRS payment plans
The IRS also offers payment plans to both individuals and businesses. However, you have to apply and get approved in order to get one. While having the plan in place won’t stop interest and penalties from accruing, it generally prohibits the IRS from levying your assets.
For individuals, the IRS offers long-term payment plans (if you need more than 180 days to pay) and short-term plans (if you need 180 days or less to pay).
- You can apply online for a short-term plan if you owe less than $100,000 in combined tax, interest, and penalties.
- Additionally, you can apply online for a long-term payment plan if you owe $50,000 or less in combined tax, interest, and penalties.
For businesses, the IRS only offers long-term payment plans. You can apply for one online as long as you’ve filed all of your required returns and owe $25,000 or less in combined tax, interest, and penalties.
If you don’t qualify to apply online, you can apply by submitting Form 9465 by mail or can call 800-829-1040 (individual) or 800-829-4933 (business). While short-term payment plans don’t come with any fees, long-term plans cost $31 to set up if you agree to automatic withdrawals and $130 if you opt to pay manually.
Dion says, “A payment plan with the IRS could allow you to spread out your tax payments over several months, helping ease any cash flow issues related to paying taxes in full at once.”.
6. Offers in Compromise (OICs)
Another option for both businesses and individuals is to submit an Offer in Compromise (OIC) to the IRS. An OIC is an attempt to settle a federal tax debt for a lump sum that’s less than the amount owed. There’s no guarantee that the IRS will accept your offer, but it can be worth a try.
Offers are evaluated based on the taxpayer’s income, expenses, asset equity, and ability to pay. They’re typically accepted if they represent the most the IRS can expect to collect from you within a reasonable timeframe.
To be eligible, you must have filed all your required tax returns and made all your required estimated payments. You also can’t be in an open bankruptcy case and must have a valid extension for the current year. If you’re an employer, you’ll additionally need to have made deposits for the current and last two quarters.
Pro tip: You can get pre-qualified for an OIC on the IRS website.
Should you use a credit card to pay your tax bill?
In most cases, it won’t be cost-effective to pay your tax bill with a credit card due to the high processing fees and high APRs. “The most common alternatives are online payment services such as Electronic Funds Transfer (EFT) and Automated Clearing House (ACH). Both methods allow you to transfer funds directly from your bank account. This removes the potential for any fees or interest payments associated with using a credit card,” says Dion.
However, paying with a credit card can make sense when the rewards on offer are higher than the fees and you plan to pay the card balance off immediately. If you can’t pay the balance immediately and need a financing solution, a payment plan, OIC, or term loan will likely be a better bet.