Don’t Pay Taxes With Credit Cards

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You're behind by 1 paymentIf you’re one of the many taxpayers who owe the Department of the Treasury some money, you might be tempted to pull out the plastic and push the payment decision off another month. Or maybe you’re thinking about paying with a credit card for the rewards. Or maybe you can’t pay and think putting it on the credit card is your only option. Whatever the case, paying with a credit card is probably the worst way to pay your taxes.

Processing Fees

There are three companies listed on the IRS website for paying taxes by credit card:

  • Official Payment Corporation – 2.35% fee, minimum $3.95
  • Link2Gov Corporation – 2.35% fee, minimum $3.89
  • RBS WorldPay – 1.95% fee, minimum $3.89

Unless you have a credit card that will give you more than 2% cash back rewards (I am not aware of any), this is a lose lose proposition. If you pay with a credit card, not only are you charged the fee, you also pay interest if you can’t pay it off in a month. If you want to go the credit card route because you can’t pay, it’s better to get a 0% balance transfer, pay the transfer fee, and then have a 0% loan for 12-15 months.

IRS Payment Plan

The IRS offers payment plans that aren’t perfect but beat paying the double digit interest rates the credit card companies charge. You will be assessed penalties and interest (based on the applicable federal rate plus 3%) but the interest rate is much lower than a credit card’s rate. You will have to factor in the agreement fee and see how it compares to your tax liability.

It almost never makes financial sense to pay your taxes with a credit card. If you’re in a drastic scenario in which you can’t get a bank loan or a 0% balance transfer, consider a social lending network. The process will take some time but the interest rate should be better than your credit card’s rate.

Just avoid the plastic!

(Photo: thetruthabout)

{ 22 comments, please add your thoughts now! }

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22 Responses to “Don’t Pay Taxes With Credit Cards”

  1. jsbrendog says:

    i pay for my preparation with my cc but never if I owed. The couple times i owed (when i was 1099) i luckily had the cash to just pay them off in a lump sum. fingers crossed I won’t have to pay them again.

  2. Andrew says:

    There are actually a two 2% cards I know of, a Schwab card (for which applications closed 4/1) and Fidelity AMEX cards.

    But I agree, paying taxes with a CC is not ideal.

  3. I never knew about the fees to pay with credit card, but it just seems like a bad idea, especially for somebody who “has” to pay with a credit card. It might be better to just pay more taxes each paycheck than having to worry about how you are going to pay the IRS.

    • echidnina says:

      I agree, taxes seem much more painless when I never have to see that money in the first place. Owing money come April would be a pain…

  4. cdiver says:

    Ouch…I’ll never use that option.

  5. Joe says:

    Really, we should just ditch the plastic for most things these days. It’s really difficult to be disciplined enough to pay off every credit card bill when it comes in every month.

  6. Mike Ramsey says:

    Nothing like paying a processing fee to pay the taxes you hate having to pay in the first place!

    One more example of how using credit cards can cost you a bunch more money, even if you pay them off every month.

  7. mikestreb says:

    The form that sets up this agreement is stupid. They charge somewhere around $120 to set it up (or ~$60 if they ACH it out of your checking account). It also mentions on the top of the form that if you expect to pay it off within 180 days, then don’t bother. Most of the people I deal with fall into that category. Then you have the serial non-payers (those that earn $60k a year and have ZERO withheld from their pay) who are dumbfounded that they owe big but don’t have the money to pay it.

  8. Kate says:

    This is a good article for those of us who are currently paying off taxes or have had to pay off taxes in the past. Thanks for the post.

  9. govenar says:

    You also benefit from the float (your money can be earning interest until your credit card bill is due), and you could pay more than you owe to get more rewards and get a refund later. But at (2%-1.95%) = 0.05% it’s not worth the trouble.

  10. Daniel says:

    I agree that it doesn’t make any financial sense to pay taxes with a credit card, but if you don’t have the cash on hand, and your only options are paying with credit card, having wages garnished by the IRS, or setting up a payment plan with the IRS, I would much rather pay with credit card despite the higher interest. If you miss a credit card payment, you’ll just get hit with a penalty. You tell the IRS that you forgot the payment this month and they can make your life a living h*ll.

  11. javi says:

    Thanks, I used to pay with my credit card, now I won’t.

  12. Shawn says:

    Paying with taxes credit cards seems so counter-productive. Why would anyone want to get robbed twice?

  13. reducereuserecycle says:

    Wouldn’t it depend what you were doing with the extra money(that wasn’t being withheld) during the year, as to whether it is a good idea to owe and pay by credit card.

    If you are earning more interest than the fee percentage, then you would be ahead. Plus you would earn points.

    Does anyone know if you do actually earn points when there it is a purchase that involves a transaction fee.

  14. I agree it almost never makes sense to pay your taxes with your credit card. It’s just throwing salt in your wounds.

  15. This is good advice. I paid my taxes with a credit card last year, and am still paying off those charges, plus interest. Fortunately, I had a lot more taken out of my pay for 2009 and winded up with a nice refund instead.

  16. Daniel says:

    I have heard of people paying taxes on credit card to get a frequent flier bonus. Some cards offer a significant bonus for >$30k in spending during a calendar year. Not worth it for me personally, but some seem to think it is.

  17. I agree. Paying the IRS with a credit card with the extra charges that you mention makes little financial sense unless you have no other method. Consider a payment plan or negotiating with the IRS and consult an accountant. Do the math.

    I advocate on my web site that you set your finances up so that you get a tax refund. I know Uncle Sam has your money interest free, but it forces savings and its nice to get a lump sum of a few thousand dollars at tax time. 70% of filers get a return and the average return is over $3000 (depending on when measured) for tax year 2009

  18. Peter says:

    This is a bit late but… does no one use 0% cards? I just recently received yet another card at 0% for 18 months + rewards. Sorry, but that makes more financial sense than the IRS installment agreement. Why pay interest and late fees at all (there is that ~2.35% fee that you will get hit with though)? I have had a running balance on my cards once in a while and never paid any interest in my life. Of course you need a decent credit score to qualify but if you do and can’t pay the lump sum with cash upfront it seems to be a great alternative.

  19. Jeanne says:

    I am not good at math. I wanted to know if someone could figure up how much fee I would pay using a credit card to pay my 2013 income tax. the fee on the credit card to pay irs is 2.35%, i owe irs $8,000.00 how much fee would that be? thank you! 🙂

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