3 Things You Should Know When Paying Your Taxes By Credit Card
While paying your tax bill with your credit card isn’t for everyone, in many cases it can make sense. For instance, it can be a helpful way to meet the minimum spending requirement on an introductory offer or a way to generate a small profit for those with excellent rebate cards. If you don’t have the means to pay off your credit card bill in full, however, it’s usually a poor choice and there are better alternatives. Many of the pros and cons are discussed in this post.
If you’re still considering paying with a credit card, though, this post touches on a few key things you should know.
1. If you’re paying via credit card, you’ll save yourself money by paying separately rather than paying when you e-file
Because the Taxpayer Relief Act of 1997 prohibits the IRS from paying credit card transaction fees, it must rely on third party vendors to process credit card payments. These vendors charge a premium when you pay as part of the e-filing process:
| Company | Standalone (Fee) | Integrated E-file/E-Pay (Fee) |
|---|---|---|
| Link2GovCorporation | Pay1040.com (1.87%, min $2.59) |
Pay1040.com/ SpecialOffers/TurboTax (2.49%, min $3.95) |
| WorldPay US | PayUSAtax.com (1.99%, min $2.69) |
fileonline.1040.com (2.35%, min $3.95) |
| Official Payments | OfficialPayments.com/fed (2.25%, min $2.50) |
OfficialPayments.com/TurboTax (2.49%, min $3.95) |
| File Your Taxes | N/A | FileYourTaxes.com (3.93%, min $2.00) |
As you can see from the table, when you e-file using tax prep software such as TurboTax, you’ll pay a convenience fee of 2.49% when paying your taxes with your credit card.
You can save yourself a few bucks when e-filing if you instead tell your software that you’ll mail a check instead. Then, you can go directly to a vendor such as Pay1040.com and pay just 1.87%.
2. There are limits on how often you can make individual and business tax payments via credit card.
The IRS limits the number of payments you can make, depending on the tax form, payment type and tax year. Not all IRS tax forms are eligible for payment by credit card. You can see these limits and restrictions in the table here.
Of particular note is that you’re limited to 2 payments per year for Form 1040. This makes it more important to plan your payments carefully in advance. If you make errors that result in the need to make additional payments, you may be restricted in the ways that you can make them if you’ve already reached your credit card payment quota.
3. If you’re paying your taxes for your business, the convenience fee is a deductible business expense
Publication 529 explicitly states:
You can deduct the convenience fee charged by the card processor for paying your income tax (including estimated tax payments) by credit or debit card. The fees are deductible on the return for the year in which you paid them. For example, fees charged to payments made in 2015 can be claimed on the 2015 tax return.
Assuming you have a decent rewards card, this makes paying your business taxes with your credit card a very cost-effective way to get miles or points. You’re effectively getting a discount equivalent to your marginal tax rate off of the 1.87% fee.
To oversimplify matters, assume you have a 30% marginal tax rate. In this scenario, you can think of paying your taxes with your credit card as equivalent to buying miles/points for about 1.31 cents each.* Most point hoarders would consider that a pretty good deal. (*Disclaimer: I am not a CPA and this should not constitute tax advice. Before taking any action, consult a tax professional to assess your own personal situation.)
To learn more
You can find more information on paying your taxes via a credit or debit card directly from the IRS here.