Depending on who you talk to, paying taxes with a credit card can either be a brilliant way to earn a plethora of benefits or a financial move that should only be a last resort.
To be clear, the Internal Revenue Service does not directly accept credit card payments. But it does accept such payments through third party processors that charge you a service fee for the convenience of paying this way.
And that’s one of the hitches to consider. While it may be easier to simply pay a tax bill with a credit card, it may not be the cheapest approach in the long run.
“If you have the money, you want to pay taxes with cash,” said Barbara Taibi, partner at the global accounting firm EisnerAmper. “You should probably only use a credit card if the rewards you get from the credit card are going to outweigh the convenience fees you pay to charge it.”
Here are some of the pros and cons to keep in mind if you’re considering putting a tax bill on a credit card.
It’s Convenient and Safe
Dani Owens, a 33-year-old Florida resident and owner of SEO firm Pigzilla, has personally paid her taxes on two occasions using a credit card. And she says she would do it again.
“I didn’t have to worry about my check getting lost in the mail or making sure to keep a high balance in my checking account so that the check would clear,” said Owens. “Plus I use a rewards credit card so I get cash back on purchases. This includes paying my taxes.”
The convenience of this approach is why it’s appealing to so many taxpayers. Paying this way also offers the added piece of mind of being safe, says Josh Zimmelman, president of New York-based Westwood Tax & Consulting.
“The IRS only uses certain payment processors that they’ve deemed safe and secure,” he explained. “Your information will only be used to process your payment and not saved or used for other purposes.”
The Rewards Perks
If you happen to have a credit card that offers frequent-flyer miles or cashback bonuses, then you might benefit from a large transaction like a tax bill, potentially earning yourself free vacation.
“You’ll have to compare the rate of the reward to the rate of the fees and see if you’re actually getting a deal or not,” advises Zimmelman.
You’ll also want to check the terms of your credit card. Some do not allow receiving rewards for payments to the IRS, says Natasha Rachel Smith, personal finance expert for TopCashback.com.
There are Processing Fees
One of the drawbacks to consider when paying taxes with a credit card are the fees charged by the companies that accept such payments.
The fees for paying with a debit card, for instance, are relatively minor, ranging from $2 to $3.95 depending on which card processor you use and how large your payment is, said Zimmelman.
When paying with a credit card on the other hand, the charges range from about 1.87% to 1.99% of the amount being paid, plus a flat-fee of $2.50 to $2.69.
You’ll Be Increasing Credit Card Debt
If you’re unable to pay off the credit card debt right away, this is not likely the best approach to paying taxes.
“You could end up putting yourself into considerable debt,” says Zimmelman. “If you’re sure you’ll be able to pay off your credit card balance, in full, relatively quickly, then using a card to pay your tax bill might actually help improve your credit score. However, more likely, this move could damage your credit score.”
Putting a large tax bill on your credit card increases your debt utilization ratio, which has a negative impact on a credit score.
The Long-Term Finance Charges
Depending on how much you owe in taxes and how long it will take you to pay the IRS, you may save money (in the form of avoiding IRS late penalties and interest fees) by paying the bill immediately with a credit card.
But it is critical that you calculate how much you’ll save or lose before you make this decision, says Zimmelman.
The IRS penalty for late payment of taxes is 0.5% of your unpaid taxes for each month that the payment is late up to 25%, according to the IRS website.
The interest rate meanwhile for unpaid taxes is determined quarterly and is the federal short-term rate plus 3%. Interest starts to accumulate on unpaid taxes one day after the due date and is compounded daily.
The IRS does however, offer installment payment plans, the rate on which is often lower than the interest on a credit card. And an added bonus – IRS installment plans do not impact your credit score.
All of which should be weighed against the interest rate on your credit card and how long it will take you to pay off the balance.
“You have to remember that your interest rate applies to the purchase and will continue to do so until the purchase is paid off,” said J.R. Duren, personal finance expert with HighYa.com “So, if it takes you six months to pay off that $3,000 and your interest rate is 16.24%, you’ll end up paying $143 in interest.”
If you don’t have the money to pay a tax bill immediately and want to use a credit card, a zero interest card may be the most cost effective approach, allowing you to avoid IRS finance charges and credit card interest charges. But once again, be prepared to pay that credit card bill in a timely manner – in other words, before the promotion ends.