Should you pay the IRS with a credit card?

If you owe taxes, you might be wondering if you can pay the IRS with a credit card. More importantly, should you?

It can be tempting to use a credit card to pay off your tax bill – doing so can buy you a little more time, and with the right rewards card, you could earn some serious points or cash back.

But it can come at a cost. “If you are paying by credit, you will see fees ranging from 1.87% to 2%,” says Jayson Mullin, founder of Top Tax Defenders.

While those fees may seem small, they could add up to a lot depending on how large your tax bill is. For example, if you have a tax bill of $5,000, a 2% fee would equal $100.

Read on to learn about the pros and cons of paying the IRS with your credit card, as well as how to pay the IRS while minimizing credit card fees.

• What to consider before paying the IRS with a credit card
• There are limitations
• What are the pros and cons of paying the IRS with a credit card?
• Using a rewards credit card to pay the IRS
• How to pay the IRS with a credit card and get the lowest fee possible

What to consider before paying the IRS with a credit card

If you have a tax liability that you can’t pay in full, using a credit card may not be your best option. With average credit card interest rates being around 16%, paying with a credit card could mean additional interest on top of your tax bill. On the other hand, the IRS late payment penalty is 0.5% each month of your unpaid taxes — up to 25% total.

Another option to consider is an installment plan, which may be a more affordable option than dealing with the fees and potential interest of paying with a credit card.

An installment agreement is a monthly payment plan with the IRS to help pay your tax debt over time. An installment agreement can be a good idea if it will take you longer than 120 days to pay your tax bill. (If you can pay your tax bill in less time, call 1-800-829-1040.)

In order to request an installment agreement, see if you’re eligible to apply for an Online Payment Agreement. Otherwise, you can complete Form 9465 Installment Agreement Request.

Keep in mind that you can’t escape fees entirely. As of Jan. 1, 2020, the installment set-up fee for making payments by means other than direct debit is $149 ($31 if established with direct deposit ).

There are limitations

It’s important to note that you can’t use a credit card for all IRS tax forms — and there may be other limitations as well.

“You cannot use a credit card to pay federal tax deposits or Form 941,” explains Mullin. Also, some tax forms have limits regarding how frequently you can use a credit card. In other words, don’t bank on the fact that you can use a card to pay the IRS for every tax form all the time.

Also, if you have outstanding tax debt, the IRS may issue a federal tax lien against you. Unfortunately, paying the IRS with a credit card won’t immediately release the federal tax lien.

What are the pros and cons of paying the IRS with a credit card?

Before deciding to pay the IRS with a credit card, it’s important to be aware of the pros and cons involved with doing so.

Pros

• You can earn rewards or cash back when using a rewards credit card.
• You may have more time to pay off the debt.
• It could allow you to meet spending requirements for a rewards card sign-up bonus.
• Fees may be tax deductible.

Cons

• Not all tax forms allow credit card payments.
• There are fees that vary based on the processor.
• Depending on your total credit limits, total credit card balances and tax bill, it could cause a high credit utilization rate, which could negatively affect your credit scores.
• Paying with a card may lead to credit card debt and additional interest if the charges are not paid in full by due date.

Using a rewards credit card to pay the IRS

Paying the IRS with a credit card can result in additional fees, but some savvy credit card holders are making back the cost in the form of rewards.

Will Woodard, Certified Financial Planner™ at DareCapital.com paid his taxes with one rewards credit card in order to reap the rewards. For him, the rewards outweigh the fees.

“Using one card and paying it off simplifies expense tracking and builds rewards points,” explains Woodard.

But this strategy only works if you pay the bill in full each month. Also, it’s important to understand the rewards structure on your card and how it compares to the fees you may incur. Are you making a profit by using a credit card or are you losing money?

How to pay the IRS with a credit card and get the lowest fee possible

If you want to pay the IRS with a credit card, you have a few options. The IRS works with three payment processors that accept credit card payments.

To minimize credit card fees, choosing Pay1040.com may be your best bet as they have the lowest fees. Additionally, you’ll want to see if you can deduct the credit card processing fees on your tax return to help reduce the impact.

Unfortunately, there aren’t many other ways to minimize credit card processing fees when paying the IRS. You could consider paying with a debit card, which has flat fees ranging between $2.25 and $3.95 and could be a cheaper alternative. Of course, you won’t reap any rewards, but you also won’t pay higher fees or additional interest.

Bottom line

If you’re facing a tax bill that you’re unable to pay upfront, paying the IRS with plastic may not be the best route.

Because credit cards can have high APRs, “those who choose to pay with a credit card and have to work at making the payments could be making a bad situation even worse,” says Chris Hardy, owner of Paramount Tax and Accounting, LLC. If you have a tax debt that you can’t pay, consider opting for an installment agreement.

For rewards junkies looking to meet sign-up bonus spending requirements, make sure you choose the right payment process to minimize fees.

You’ll want to make sure you’re actually profiting off the payment and not just getting into more debt. Otherwise, you’ll have bigger problems than just a tax bill on your hands.