Whether you’re looking for a way to pay off an emergency expense or a way to earn credit card rewards, you might be wondering if there’s any benefit to paying taxes on credit.
Unfortunately, putting taxes on a credit card is often a losing game.
“As a small business owner, I usually have a pretty large tax bill,” says Matthew Robbs of SmartSavingAdvice, a website designed to help people make informed financial decisions. “I’ve considered paying taxes on my credit card, but a lot of people don’t realize there’s a 2% charge for doing that. If you only get 1% cash back or miles on your tax payment, you are actually wasting money paying your taxes via credit card.
In addition to losing money on fees, you also run the risk of turning your outstanding tax balance into an outstanding credit card balance. Putting your tax payment on a credit card could cost you extra money every month in the form of interest charges – unless, of course, you choose a credit card with an initial interest rate of zero percent – and paying your taxes on credit could raise your credit utilization rate to the point that it lowers your credit score.
Can you earn rewards by paying taxes with a credit card?
Some people wonder if paying taxes with a credit card could help them earn sign-up bonuses or other credit card rewards. The good news is that it is possible to earn rewards on your credit card for your tax payment. The bad news is that the fees associated with crediting your taxes could negate many of the rewards you earn.
“The only way to make money paying your taxes with a credit card is to get more than 2% cash back,” says Robbs. While many of today’s best cash back cards offer over 2% cash back on popular spending categories like groceries or gas, tax payments rarely qualify for more. than the base reward rate – 1% or 1.5%, in most cases.
Even if you have a card that offers 2% cash back, it will cost you between 1.87% and 1.98% of your total tax payment to use an IRS eligible credit card payment processor. At best, you’ll break even, and the value of your credit card rewards might be less than the money you pay in fees.
“Paying your taxes by credit card is not a good option because of the 2% fee the IRS charges to make a credit card payment,” says Robbs.
The bottom line
It is possible to pay taxes with a credit card, but it is not recommended. The risk of incurring credit card debt is too high and the benefits you could gain by putting your taxes on credit are too low.
If you plan to put your taxes on credit to earn cash, points, or miles, make sure that any rewards you earn are worth more than the fees associated with paying by credit card. Otherwise, you’ll lose money overall, regardless of any interest charges you may incur if you don’t repay your tax payment in full.
If you can’t afford to pay your taxes, consider applying for a IRS Payment Plan instead of putting your payment on a credit card. If you want more information on how to pay your taxes or what to do if you can’t pay your tax bill, we have a helpful tax guide to get you started.