*Editorial Note: This content is not provided or commissioned by the credit card issuer. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through a credit card issuer partnership.
This article was last updated Oct 09, 2017, but some terms and conditions may have changed or are no longer available. For the most accurate and up to date information please consult the terms and conditions found on the issuer website.
If you plan to pay your taxes with a credit card, but NOT pay it off in full, read on carefully. Paying taxes with a credit card may not seem like a big deal because people do it all the time. It's just like buying a piece of furniture or a small car, right? Just because a lot of taxpayers do this doesn't mean it's the right option for you. The fact is that you could significantly increase your tax debt by paying with a credit card.
Before you rely on plastic payments to cover your taxes, you have to assess your expenses. You probably don't realize just how much money you'll be spending over time. We have compared the costs and considered all the options, and now we're here to show you just how much of a mistake this could be. Here is an overview of the true cost of paying taxes with a credit card, broken down fee by fee.
Credit Card Processing Fee
The IRS will only allow you to pay with a credit card through their trusted payment processors. Each processor has a different fee that it charges for taking care of your payment. Those break downs are as follows:
- Official Payments: 2.35%
- Choice Pay: 1.88%
- Pay 1040: 2.35%
- Business Tax Payment: 2.35%
- Pay USA Tax: 1.89%
These are just the credit card fees. If you pay with a debit card, you will pay a flat fee of $3-$4. At minimum, add one of the percentages above to your current tax debt and that is what you will spend by paying with a credit card.
If you do not pay back your tax balance in full by the end of the your next billing cycle, you will start to acquire interest charges. The average credit card carries anywhere from 13% to 22% APR, with some cards going much higher than that. Of course, if you have the money to pay back your balance, you won't have to worry about this. If you have to pay over time though, you could be in for a rude awakening.
Note that the IRS usually charges less than 2% interest for their installment plans. If you are going to take a while to pay back your tax debt, you'll save money by working directly through them. This may seem more risky because you owe money to the government, but as long as you keep up your payments, you'll stay out of trouble.
Cash Advance Fees
Some credit card companies consider tax payments to be cash advances. You will have to check with your provider to determine if your company is one of them. If so, you will need to tack on whatever your cash advance fee is to your tax debt. This might be a percentage of the payment you make, or it could be a flat fee. Either way, it's more money out of your pocket.
Card Issuer Fees
In most situations, a merchant will pay a small fee for accepting a credit card payment. The IRS is exempt from this charge though, so it falls onto you, the taxpayer. Assume that you'll pay an additional 2%-3% for a credit card provider fee, unless you have a special card that is exempt from that. Talk to your credit card company to confirm your situation.
To put all of this into perspective, let's say that you have $5,000 in tax debt that you will put on a Citi Simplicity® Card - No Late Fees Ever and you choose to use ChoicePay to complete your payment. Your credit card has an intro APR of 0%* for 18 months on purchases*, giving you plenty of time to get your debt down. In spite of that time frame, we'll assume that you only make monthly payments of $100 for the duration of your debt. Your APR after that will be 15.24% - 25.24%* (variable). Here is how everything will add up:
- Initial debt: $5,000
- ChoicePay fee: 1.88% x $5,000 = $94
- Visa fee: 2.2% x $5,000 = $110
- Interest for 18 months: $0 (remaining balance of $3,200)
- Interest until payoff (40 months total): $749.86 (per the CompareCards debt payoff calculator)
- Total: $5953.86
You would pay nearly $1,000 more in tax debt just by paying on your card, and it would take you close to 5 years to pay it off. If you added more debt on top of that, you could be paying on your taxes for the rest of your life. Also consider the detrimental effects your credit score will face when you tack on a big chunk of debt like this really quickly. Is all that worth the relief of not owing anything to the government?
Before you settle into using a credit card to pay taxes, consider working out an installment plan with the IRS. You'll be able to save money this way, and you'll still be on good terms with the government. Of course, everything changes if you can pay your debt off quickly. Assuming that's not the case though, just talk to the IRS and see what you can work out.
*Editorial Note: This content is not provided by Citibank. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by Citibank.
*The content in this article is accurate at the publishing date, and may be subject to changes per the card issuer.