Owing money to the tax man is never fun, but that’s especially true if your tax debt comes as a surprise. Perhaps you thought you paid in more than enough this year. Maybe you forgot to adjust your tax withholding after last year’s tax bill — or earned a lot more money with your side hustle than you expected. Whatever the reason, the fact you owe the IRS money is now an emergency – and you need to act fast.
If you have the cash to pay on hand, your next steps are simple. Suck it up, write the check, and give your employer a new W-4 form that instructs them to withhold more money for taxes, so you aren’t in the same predicament next year.
If you don’t have the money, on the other hand, you’ll have to come up with another way to avoid tax trouble. For some people, that means charging their federal tax bill to a credit card.
Can I Pay My Taxes With a Credit Card?
If you’re considering this option, it’s important to know that, yes, you can absolutely pay your federal taxes with a credit card. But, should you? Now that’s an entirely different question.
There are some benefits that come with paying with credit. If you owe money and don’t want to set up an installment plan with the IRS, for example, paying with a credit card can help you avoid it. If you have a credit card that earns an extremely high rate of cash back rewards, you may also end up “ahead,” or at least even, when you pay with credit.
On the flip side, however, paying your federal tax bill with a credit card isn’t free. Several companies have been approved by the IRS to process your credit card tax payments, although their individual fees for this service vary. The table below highlights those charges and how they work:
|Processor||Debit Card||Credit Card|
|Pay1040.com||$2.59 flat fee||1.87% fee
|PayUSATax.com||$2.69 flat fee||1.99% fee
|OfficialPayments.com/fed||$2.50 flat fee|
($3.95 flat fee for
payments over $1,000)
As you can see, paying your taxes with a credit card carries extra costs, which are often enough to offset any credit card rewards you might earn. And remember, these charges don’t include interest charged by your card issuer if you don’t pay the balance in full next month. If you pay your taxes with a credit card and then take forever to pay it off, you could accrue hundreds or even thousands of dollars in interest charges.
As an example, let’s imagine you owe a $5,000 tax bill and choose to pay with a credit card. With the Pay1040.com website, you’ll fork over 1.87% upfront for a total balance of $5,093.50. If your credit card sports an 18% APR and you take 36 months to repay it, you’ll end up forking over an additional $1,537 in interest alone. If you hope to pay off your balance in 12 months, on the other hand, you’ll owe around $467 per month — and you’ll still pay $510 in interest charges!
When Does It Make Sense to Pay Taxes With a Credit Card?
Before you pay your taxes with a credit card, think long and hard about the extra costs associated with this option. However, there are certain situations where paying with credit might make sense. Here are a few instances where paying your taxes with a credit card could be a smart idea:
- You’re earning more than 1.87% cash back on your credit card and have the cash to pay your taxes in full. If your credit card earns a high cash-back or rewards rate of 2% or better, you could pay your tax bill with credit and turn a slight profit. Of course, you won’t make any money at all if you carry a balance into the next billing period. The key to making this strategy work is paying your credit card bill right away and in full to avoid interest charges.
- Your credit card offers 0% APR on purchases. If your credit card offers 0% APR for a specific length of time, charging your tax bill would let you pay off your balance over time without interest. However, you won’t escape the 1.87% to 2.25% fee you have to pay upfront.
Another Option: An IRS Installment Plan
If you’re leery of charging your tax bill to a credit card, you can also consider an IRS installment plan. According to the IRS, individuals may qualify to make online monthly payments on their tax bill provided they owe less than $50,000 in taxes, penalties, and interest, and have filed all required returns. Per the IRS, individuals who don’t qualify for an online repayment plan can still make installment payments if they complete and mail Form 9465, Installment Agreement Request and Form 433-F, Collection Information Statement.
Just like credit cards, however, choosing an IRS installment plan isn’t free. If you need to make installment payments on your federal tax bill, here are some of the fees you can plan for:
- Processing fee: To set up your IRS installment plan, you’ll need to pay a processing fee equal to $52 for direct deposit or $120 if you pay via payroll deduction. If you earn less than 250% of the Federal Poverty Limit, you may qualify for a reduced processing fee of $43.
- Interest: The IRS charges interest on your balance, similar to a credit card — but quite a bit lower; think single digits as opposed to the mid-teen rates on most credit cards. Right now, the rate is determined using the federal short-term rate plus 3%.
- Penalties: Once you set up an installment agreement, you should plan on paying 0.25% per month in penalties.
Beyond the installment option, the IRS offers one more benefit for consumers who only need a short time to repay their tax bill – a full-pay agreement. If you cannot pay in full immediately, notes the IRS, you can request an additional 120 days to pay your bill in full.
There is no fee to pursue this option. However, your tax bill will continue to accrue interest and applicable penalties until your tax bill is completely paid off. For information on full payment agreements of up to 120 days, The IRS suggests calling them directly at 800-829-1040 (individuals) or 800-829-4933 (businesses).
If a large tax bill is looming and you don’t know what to do next, you have more than one option at your disposal. You can charge your tax bill to a credit card if it makes sense, but you can also ask for a temporary extension or set up an installment plan with the IRS.
No matter which option you choose, you should update your tax information and tax withholding right away to avoid a repeat situation next year. The only thing worse than owing the tax man this year is owing money next year, too.
Have you ever paid your taxes with a credit card before? Why or why not?