Updated for 2021. The major change was Pay1040 increasing fees from 1.86% to 1.99% for credit card payments, making it no longer the cheapest option.
It’s that time of the year again, time to pay taxes! For a lot of people, this is their biggest expense of the year and wouldn’t it be great if you could pay your taxes with a credit card? Well as the IRS website clearly states, you can.
Disclaimer: We’re not accountants, this does not constitute tax advice. Please consult a tax professional.
- 1 The Basics
- 2 Fees
- 3 Making It Worth It
- 4 Our Verdict
- 5 F.A.Q’s
The Tax Payer Relief Act of 1997 allowed the IRS to accept credit & debit card payments (under section 6311(a)) and payments were able to made from January 1st, 1999 onwards due to this temporary act. The IRS has authorized three third party providers to process tax federal taxes on their behalf: Pay1040, PayUSAtax & ACI Payments (formerly Official Payments). The reason why the IRS doesn’t process credit cards directly is they are forbidden from charging fees directly for these services due to other federal laws. None of the money these providers collects goes to the IRS and some of these providers can also be used to pay State taxes (we’ll cover this in another separate post).
In this guide we’re going to assume you have the cash to pay your credit card in full, if you don’t have the ability to do this then paying with a credit card is a terrible idea due to the high interest rates credit cards charge. If you can’t pay in full then you’ll most likely be better off with a payment plan/installment agreement with the IRS, more information on this can be found here.
Obviously all these third party providers charge fees (ranging from 1.9% to 2%), those fees are what we look at first.
Another option is to use the Plastiq bill payment service. Plastiq allows paying any bill, including tax payments, with a credit or debit card.
Obviously all these third party providers charge fees (ranging from 1.96% to 1.99%), those fees are what we look at first. We’ve also included the fees for debit card payments and digital wallet payments. According to Way Back Machine, the fees have been very similar for awhile now (actually mostly getting slightly cheaper since 2012).
|Debit Cards||Credit Cards||Digital Wallet|
|Pay1040.com||$2.58 flat fee for consumer/personal cards and 1.99% for all other debit cards (minimum $2.58)||1.99% (minimum $2.58)||See debit/credit card fees|
|PayUSAtax.com||$2.55 flat fee||1.96% (minimum fee $2.69)||See debit/credit card fees|
|ACI Payments (formerly OfficialPayments.com/Fed)||$2.00 flat fee ($3.95 for payments over $1,000)||1.99% (minimum $2.50). AmEx over $100,000 is 1.9%||See debit/credit card fees|
There are higher fees if you use any tax preparation software, those can be viewed here.
As for Plastiq, the standard fee is 2.85% for Visa, Mastercard, Discover or Amex.
Making It Worth It
High Cash Back/Rewards Cards
As you can see, PayUSA is the cheapest option at 1.96%. Even if you used a credit card that earned 2% (e.g Fidelity Visa or Citi Doublecash) you’d only be making 0.04% profit. Even if you had to pay $10,000 in taxes, you’d be earning $200 in rewards but having to pay $196 in fees for a profit of $4. Not exactly worth it. Now if we could reduce our fees, then we might be onto something.
Claiming The Fees On Tax
On the IRS page you’ll notice the following (emphasis mine):
The fees vary by service provider and may be tax deductible
Update 2018/2019: Looks like 2%+ miscellaneous deduction option is gone effective 2018.
Nothing like something vague and ambiguous to give to confidence that you can claim these fees as a deduction. In 2009, the IRS introduced a new law that allows some people to deduct these expenses when you file electronically. You can view their statement on this on the official IRS website. Here is what you need to be aware of:
- Convenience fees associated with payment of federal tax can be included as a miscellaneous itemized deduction
- Only those miscellaneous expenses that exceed 2% of the taxpayer’s adjusted gross income can be deducted
You can view what the IRS considers a miscellaneous expense here. But for most people I doubt they will exceed 2% of their adjusted gross income. So there goes that idea.
Things are a little clearer for business taxes, they state:
- For business tax types, the fee is a deductible business expense.
Meeting Minimum Spend Requirements
As easy manufactured spending methods dry up, more and more people are happy to pay a fee to meet minimum spend requirements. That’s because they usually have large sign up bonuses relative to the minimum spend requirements.
If you owe $10,000 in taxes, then chances are you don’t want to be paying $187 in fees just to meet one minimum spend requirement (especially since most of them only require ~$3,000 or less in spending). Thankfully the IRS allow you to split your payments up, how many times you can do this depends on what sort of tax you’re paying. They provide a full table here.
If you use Plastiq, there is no limit to the amount of payments you can make. You’ll pay with a card, but each payment will be sent to the IRS via mailed check. The limits given by the IRS are only for card payments, not check payments.
I think paying your taxes with a credit card is generally not worth the effort involved, unless you want to meet a minimum spend requirement and are happy to pay the fees involved. Even using a 2% card doesn’t net much profit unless you have a massive tax bill. Liquidating prepaid gift cards could still be worthwhile for some.
Feel free to ask other questions below and I’ll update the F.A.Q as we go along. Also remember that we’re not tax professionals, please consult with one of them relating to anything tax related.
Do Any Credit Cards Code Any Of These Sites In A Bonus Category?
Your payment will be broken down into two different payments:
- Your actual tax payment will show as “United States Treasury Tax Payment”
- The convenience fee charged will show as ” Tax Payment Convenience Fee”
As far as I know no credit cards will earn a category bonus on this purchase. It’s possible that they do.
Can I Use Visa/Mastercard/American Express Gift Cards To Make A Payment?
Some people have had success in doing this in the past, apparently Official Payments allows you to use more than two debit cards when paying over the phone. Just keep in mind you’ll be paying a $2.25 fee per card. I have no idea if this still works or not.
Will I Be Charged A Cash Advance Fee?
As far as I’m aware, no major credit card issuers charge a cash advance fee. This is confirmed by the websites of each of the payment processors:
Update: We’ve updated this post to make it relevant for 2020, hope you enjoy! One thing to note is that the IRS is no longer prevented from fees for processing credit/debit cards directly under 26 U.S. Code § 6311(d)(2) as amended. This won’t make a difference for this tax year, but might make things interesting for 2021. Hat tip to reader Superman