Can You Pay Your Taxes With a Credit Card?

Can You Pay Your Taxes With a Credit Card?

Yes, it's possible to pay your taxes with a credit card. While it's relatively easy, you still must use one of two IRS-approved companies—Pay1040 and ACI Payments—to make the tax payment. Those companies accept debit and credit card payments issued by Visa, MasterCard, American Express and Discover.Be aware that these processors add a fee to facilitate your credit card payment. It's illegal to add these charges in some states, but that restriction doesn't apply to transactions with the federal government. The fee amount can vary depending on which payment processor you use.

What Is the Fee for Paying Taxes With a Credit Card?

The fees charged by the two IRS-approved payment processors vary depending on the provider you use and the amount you charge. Pay1040 charges a 1.75% fee on credit card payments, while ACI Payments charges 1.85%. Both companies charge a higher rate for commercial and business credit cards and apply a minimum fee of $2.50 per transaction.

For example, a $1,000 tax payment would result in a fee of $17.50 through Pay1040 or $18.50 through ACI Payments, while a $10,000 payment would cost $175 or $185, respectively. You'll want to factor these fees and your credit card's interest rate into your decision before using a credit card to pay your taxes.

Keep in mind that you'll also pay interest at your credit card's annual percentage rate (APR) if you charge the tax payment and do not pay it off right away.

Pros and Cons of Paying Taxes With a Credit Card

Credit cards are a convenient option to pay your taxes if you can't pay the debt by the deadline and don't want to open an IRS installment plan. However, there are risks you must consider before proceeding.

Tip: A credit card payoff calculator can help you see how long it would take to pay off your tax bill on a credit card. It'll show your estimated monthly payments, total interest and payoff timeline based on your balance and APR.

Should You Pay Your Taxes With a Credit Card?

Deciding whether to pay your taxes with a credit card is a personal choice that depends on your unique financial situation and goals. If you can't pay the taxes on time, you'll want to run the numbers before charging the taxes to your card. Will the processing company's fee (1.75% or 1.85%) and your credit card's interest charges cost more than IRS interest and penalties that could rise over time?

When to Consider Paying With a Credit Card

• You can avoid IRS penalties by doing so. The only way to avoid IRS late-payment penalties is to pay off your balance in full. A credit card can help you do that, but doing so will result in processing fees along with potential interest charges.
• You're eligible for a 0% intro APR credit card. If so, you may have a promotional period ranging from 12 to 21 months to pay off the debt without incurring interest.
• You are certain you can pay the balance in full. Regardless of your credit card's interest rate, you could avoid interest charges if you pay the balance in full before the due date. If you charge your tax bill close to the April filing deadline, you may have a few extra weeks beyond the deadline to repay the balance before interest applies.

When to Avoid Paying With a Credit Card

• The fees outweigh the rewards. If you're charging the payment to earn cash back or other rewards, it may not be worth it if the rewards rate is low. For example, a flat 1% cash back card earns less than the 1.75% to 1.85% processing fee you'd pay to charge your taxes.
• Your credit score could take a hit. Paying a large tax bill with a credit card also isn't a strong option if you're looking to protect your credit score. The higher credit card balance and credit utilization ratio could hurt your credit scores and affect your odds of approval for future loans and credit cards.
• You don't qualify for a low- or no-interest credit card. If you must use a high-interest credit card, the charges may be too steep to make it worthwhile, especially if you're facing a steep tax bill.

How Do IRS Installment Plans Work?

If you've filed your tax return but can't pay what you owe, the IRS offers two payment plans to help you pay what you owe:

• Short-term payment plan: With this plan, you'll pay off your debt within 180 days. It's free to set up, but you'll pay the current interest rate plus the failure-to-pay penalty until your full bill is paid.
• Long-term payment plan: You can choose this plan if you need more than 180 days to pay off your tax bill. The setup fee can range from $22 to $178, depending on your income level, how you request it and whether you choose automatic or manual payments. You'll pay the IRS' interest rate and the failure-to-pay penalty until your installment plan is completed.

If you're experiencing financial hardship, you may qualify for another option called an offer in compromise. This feature allows you to potentially settle for less than what you owe. However, the eligibility criteria are strict.

Learn more: How to Set Up an IRS Payment Plan

Other Ways to Pay Your Taxes

If you're not sure about setting up an installment agreement with the IRS or the repayment term is too short, you may want to explore other options.

• Use emergency savings. No one likes dipping into their emergency funds, but it's a situation the fund is meant for. It may also be your most affordable option, especially if you can pay the entire amount owed at once, as it helps you avoid interest, penalties and potential long-term debt.
• Consider a personal loan. If you have good or excellent credit, you may qualify for a personal loan with a lower interest rate than what you'd get with a credit card. In fact, the average rate on a two-year personal loan is 11.65%, while the average credit card rate is nearly double that at 22.30%, according to the most recent Federal Reserve data. IRS installment plans start with 7% interest, but those rates can change quarterly and include penalties, so a personal loan may make sense if you want fixed payments and a fast way to pay off your IRS balance.
• Ask family for help. You may also consider getting a loan from a family member or friend. You may be able to get money at a low interest rate, or none at all, and decide with them how you'll pay it back. Just be sure to stick to your repayment plan to preserve your relationship.
• Consider tapping home equity for large balances. If you have a large tax bill, a home equity line of credit (HELOC) or loan may give you the necessary funds, typically up to 85% of your home's value. Proceed cautiously, however, because your home acts as collateral, which means falling behind on payments could put you at risk of foreclosure.
• Take a 401(k) loan. If your employer allows you to borrow from your 401(k), you could use the funds to pay your IRS balance and repay your loan with interest. Borrowing this way could also help you avoid credit card interest and IRS penalties. Consider the risks before proceeding, including slower growth of your retirement funds because your investment balance is lower.

Frequently Asked Questions

The Bottom Line

Before paying your income taxes with a credit card, make sure you understand how much the processing company charges to run your payment. Using a credit card can buy you some time to pay your tax debt, but it'll start accruing interest if you don't repay it before your due date. If you think you'll need more time to pay, it may be cheaper to request a payment plan with the IRS, especially if your credit card carries a high interest rate.

If you decide to use a credit card, lowering your interest rate can help keep costs down. Experian lets you view top credit cards and get personalized credit card offers based on your credit profile, which may help you find a lower-interest option before you pay.