Paying a Tax Bill With a Credit Card

Understand the options and costs

Your tax bill has come and gone with you still owing money because you're a little strapped for cash. Or maybe you're considering alternative payment options for your upcoming quarterly estimated tax payment. There's also noise out of Washington, D.C. that checks will no longer be accepted. Whatever the case, the IRS continues to make credit card payments an option for you to pay your taxes. Here's what you need to know about using credit cards when considering this option to pay your tax bill.​

What you need to know

The IRS has contracted with several credit card merchants to offer credit cards as a method of payment. Why not? Most of us are used to paying for merchandise from groceries to sweaters with our credit card. Ah, but there's a catch. Stores (called merchants by the credit card companies) pay a fee that is split between the merchant's credit card bank, the transaction processor, and your credit card company for each transaction. This fee, known as an interchange fee, is not going to be paid by the IRS. You must pay it.

The processing fee

The fee paid by you for paying your tax bill with a credit card is called a convenience fee by the IRS and the credit card processors. The fee is based on a percent of the amount charged from 1.75% to 1.85% with a minimum fee of $2.50 or more. For example, using Pay 1040 Corporation's credit card transaction fee of 1.75% with a $2.50 minimum fee, and a tax bill of:

• $150.00 would cost you $2.63.
• $1,000.00 would cost you $17.50.

But don't forget, if you don't pay your credit card balance in full you must also include the interest cost of the loan you're taking out courtesy of the credit card company. This incremental interest could be as high as 25%!

The good news. You can use any of the four major credit cards to pay your taxes: Visa, Mastercard, American Express, or Discover. In addition, you can earn miles and points if you use a rewards credit card.

The bad news. This payment method adds an expense to your tax bill. Plus, you are limited to the number of payments you can make using this method to two per year.

Better alternatives
Remember, if you are considering paying your taxes with your credit card and you carry a balance from month to month you are really taking out a loan to pay your taxes. Using this perspective:
Get a better loan somewhere else. Perhaps a short-term loan from a bank or credit union makes more sense. Consider borrowing the money from a family member. If you create the proper loan documentation, it might be a good way for that family member to earn a nice interest rate.

Consider borrowing from Uncle Sam. There are installment payment plans available for qualified taxpayers. While there is a set up fee, the monthly interest charged by the government is typically much lower than that charged by credit card companies.

Use planning to your advantage. Create a plan to pay for next year's tax obligation throughout the year to avoid a repeat of needing funds to pay your tax bill. This may cause some hardship, but saving a little bit more each week through payroll withholdings is usually more manageable for most of us versus a big tax bite in April.

While paying your tax bill with a credit card is often one of the most expensive ways to pay your taxes, it's vastly less expensive than paying high penalties and interest on unpaid taxes.

"Tax Tips" are published to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office.
 
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
 
We are trusted CPA advisors servicing Burr Ridge, Hinsdale, Willowbrook, Darien, Naperville, and all Chicagoland area. 

Do you need assistance with your business and/or personal tax returns? Would you like to have a trusted source for your accounting, allowing you additional time to focus on increasing your business? Do you use QuickBooks, or plan to in the future, for your accounting? We include these in all our service packages, customized to fit your personal or business needs.  
 
We are currently accepting new clients. Your initial consultation is free, so you have nothing to lose and everything to gain. Our experienced staff is available to help you streamline your accounting, giving you more free time for yourself. Set up an appointment today by calling (630) 320-3720 or email us at [email protected]. 
 
For more free resources, such as Tax Organizers, and Record Retention Schedules, access our website www.monarchaccountinggroup.com.

Mia Verc, CPA;  Janice Papais, CPA