It's never a good feeling when you finish your tax return and find that you owe the government money. It's even worse when you don't know how you're going to come up with the cash to pay off that tax bill.
The solution may be in your wallet—your credit card. The IRS now accepts credit card payments to settle your account—but you will pay for the privilege of using it. (The IRS is taking debit card payments as well, but that's really more of a convenience, since you need the money in your account to use a debit card.)
Here's how it works:
You’ll have to pay a convenience fee to the credit card processor for using their services. By law, the IRS does not collect any part of this fee.
For credit card payments, the processors charge a percentage of your total payment. Depending on the processor, that percentage ranges from 1.88% to 2.35%. No matter how much you owe, you’ll have to pay to the processor a minimum amount (they call it the minimum convenience fee), which ranges from $2.99 to $3.95.
For debit card payments, the processors charge a flat fee. These vary from $2.99 to $3.95.
When you get your monthly credit card statement, your tax payment will be listed as “United States Treasury Tax Payment.” The fee you pay will be listed as something like “Tax Payment Convenience Fee.”
Paying your taxes by credit card is convenient and can buy you time if you owe hundreds of dollars and can’t come up with the cash right away. Even if you do have cash, you might decide to make your tax payment by credit card simply to earn extra rewards points.
But don’t forget that you’re also paying a fee for that convenience. If you owe $5,000, for example, you’ll pay an additional $94 if you choose the processor with the lowest credit card fee (1.88% of $5,000).
You’ll also end up paying interest on that tax payment if you don’t pay off your credit card bill at the end of each month. You could get around this by looking for a credit card with a 0% or 1% introductory rate and paying off the amount of taxes that you charged before the introductory period expired.
If you owe a large amount, you might want to consider taking advantage of the IRS’ installation payment program. Or you could consider getting a home equity loan or personal loan, which would have lower interest rates than credit cards.
Before you decide to use your credit card to pay off your taxes, compare the long-term cost of all your options, taking into account any fees or interest you’ll pay. Don’t forget to consider the impact that owing a large amount of money on your credit card could make on your credit score.