How To Pay Your Taxes With A Credit Card In 2021

by Holly Johnson and Chauncey Crail

Forbes Advisor

Saturday April 3, 2021

Stock image
Stock image  (Source:Getty Images)

The only simple thing about paying taxes is that theoretically, we all have to.

When it comes to paying tax liabilities when filing a tax return each year or — for those self-employed individuals and entrepreneurs that pay income taxes multiple times per year — each quarter, Uncle Sam provides several means of forking over the dough. Paying taxes with a credit card can be tricky but remains a reasonable option when done the "right" way.

For credit card reward junkies (and anyone with a credit card), a tax bill presents an opportunity: To earn additional points, miles or cash back — including significant bonuses that can be worth a thousand dollars or more.

Here's what you need to know about paying taxes with a credit card in 2021:


Comparing Federal Tax Payment Options

The first thing to understand about paying taxes with a credit card is that this transaction will not be free. Third party payment processors charge fees to process transactions and submit payments to the Internal Revenue Service (IRS) and they charge additional fees for the convenience.

When it comes to federal taxes, the IRS makes things easy by providing information about paying a tax bill on its own website. The IRS also authorizes three companies to process credit card payments for federal taxes.

The graphic below shows the three companies authorized to accept payment for a federal tax bill along with the respective fees they charge.

There are a few additional details to note about paying your federal taxes with a credit card, per the IRS:

  • Tax payments over $100,000 may come with special requirements and these payments must be processed over the phone instead of online.

  • Different types of tax payments come with a maximum number of times you can pay with a credit card each year.

  • Employer's federal tax deposits cannot be paid with a credit card.


    State Tax Payment Options

    In addition to federal taxes, some states facilitate tax payment with a credit card. This is possible for both state income taxes as well as business taxes, but only in states that offer these options.

    Requirements for different states vary, as do the payment processors. Options are limited by the state in which a taxpayer resides. Costs also vary.

    Mastercard offers excellent information on the various credit card processors that are authorized to allow state tax payments via credit card. The website OfficialPayments.com is the most common option available in states that allow tax payments to be made with plastic.

    In Indiana, for example, it's possible to use the website OfficialPayments.com to pay state income taxes (but not business taxes) for a fee of approximately 2.4%.

  • Why Pay Taxes with a Credit Card?

    Before deciding whether or not to pay taxes with a credit card, think about reasons that it makes sense to do so. Having a reason or incentive to pay taxes with a credit card is a must — without one, the extra fee only adds to the tax bill. If this is the case, write a check instead. (Unless, of course, you like spending unnecessarily on convenience.)

    Here are the most common reasons to pay taxes with a credit card, despite the added cost:

    Use a Rewards Credit Card to Rack Up Points or Miles

    One common reason consumers pay taxes with a credit card is the reward earning potential offered by certain credit cards. While it adds an additional fee to pay your tax bill with a credit card, it's not difficult to find cards that offer rewards worth more than the fee.

    For example, the three processing companies that accept credit cards for federal tax payments all charge less than 2%, with PayUSAtax charging the least at 1.96%. With that in mind, it's important to choose a card (or cards, if an earning cap exists) that offers more than 1.96% cash back, or the equivalent in rewards (which will vary depending on personal valuations of points and miles).

    Even without having to consider the value of various rewards points, you can simply pick up a card that earns a solid flat rate on purchases like the Citi Double Cash Card or Alliant Cash Back Visa Signature Card.

    While paying 1.96% on a tax bill to earn 2% to 2.5% back may not seem like it would be worth the effort, for enormous tax bills even a small percentage of profit can add up fast.

    Imagine for a moment someone owes $50,000 in federal taxes this year and pays a fee of 1.96% to use a rewards credit card that earns 2% back. In this hypothetical, $20 worth of rewards could be earned. This may not be compelling to someone paying $50,000 per year in taxes, but it could be more convenient than writing a check.

    But some points are worth considerably more than others. For example, let's imagine the same person paid 1.96% on the same $50,000 with The Blue Business® Plus Credit Card from American Express, which earns 2 Membership Rewards points per dollar spent on the first $50,000 spent each year (then 1 point per dollar on all other purchases). This tax payment would net 100,000 Membership Rewards points for a fee of $980. Those 100,000 Membership Rewards points can be worth well over $2,000 in value, depending on how they are utilized.

    Score a Huge Welcome Bonus (or Three)

    Earning ongoing rewards with a credit card for everyday spending is smart, but what about the possibility of earning a huge welcome bonus by meeting a minimum spending threshold? With a substantial tax bill, it may be possible to earn even more than one welcome bonus, which could result in hundreds or even thousands of dollars of value.

    Paying a $7,000 federal tax bill via credit card could earn the welcome bonus from the Chase Sapphire Preferred card: Earn 80,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. That's $1,000 when you redeem through Chase Ultimate Rewards®. Plus earn a $50 statement credit towards grocery store purchases within your first year of account opening. The bonus minus fees for using a card to make the payment is a pretty nice incentive.

    It would also be possible to earn the welcome bonus on the Capital One Venture Rewards Credit Card: Earn 100,000 bonus miles when you spend $20,000 on purchases in the first 12 months from account opening, or still earn 50,000 miles if you spend $3,000 on purchases in the first 3 months.

    By splitting a tax bill across two rewards credit cards, it's possible to earn a bank of travel rewards with only one expense — a necessary expense plus nominal fees that may be worth it. Remember that these bonuses are doled out on top of the rewards earned for everyday spending — cards with high cash back or points spending may still earn points in addition to the welcome bonuses when used to pay tax bills.

    Depending on the minimum spending requirements for the cards chosen and the tax bill in question, it's possible to earn three or more bonuses. Just remember that different types of tax payments come with a maximum number of payments allowed each year — though it may be possible to rotate between different payment processors.

    Avoid Interest for a Year or Longer

    For those interested in securing a short-term loan without paying interest, paying taxes with a credit card can make sense. Just remember that a fee applies any time someone pays taxes with a credit card — and that introductory 0% APR offers don't last forever.

    Here's a good example of how this might work. Imagine for a moment a $7,000 federal tax bill but not enough cash in the bank to cover it. In this case, it may be advantageous to apply for a card like the Chase Freedom Unlimited which grants cardholders a 0% Intro APR on Purchases for 15 months, followed by a variable APR based on cardholder creditworthiness (currently 14.99 - 23.74% Variable).

    At the moment, this card is offering the ability to earn a welcome bonus: Earn a $200 Bonus after you spend $500 on purchases in your first 3 months from account opening. Cardholders will also earn 1.5% back for each dollar spent on other purchases.

    If a new cardholder is able to use it to pay a $7,000 federal tax bill, the minimum spending requirement would immediately be met. That would result in earnings of $305 in rewards from the welcome bonus plus those from the 1.5% cash back. With PayUSAtax, a 1.96% fee would be charged, or $137.20. After accounting for the fee, $167.80 in rewards would be left with this strategy, and the card's balance would be subject to the introductory APR offer.

    There are a number of other credit cards available that we've listed as the best for 0% APR periods.

    As with any 0% APR strategy, don't get lulled into a false sense of security. When the 0% APR period ends, the interest charges will start racking up quickly.

    Meet an Important Spending Threshold

    There are also some scenarios where it makes sense to pay taxes with a credit card in order to reach an important spending threshold, and these instances aren't limited to earning credit card welcome bonuses. It may be worthwhile to spend a certain amount of money to reach the next level of elite status with a hotel credit card or an airline credit card, for example.

    Take the Citi / AAdvantage Executive World Elite Mastercard, for example. This card offers consumers a welcome bonus: Earn 50,000 American Airlines AAdvantage® bonus miles after making $5,000 in purchases within the first 3 months of account opening. Plus, Admiral's Club® membership. Cardholders also earn 2 miles per dollar spent on American Airlines purchases and 1 mile per dollar on all other purchases.

    This card does charge an annual fee of $450, but comes with Admirals Club lounge membership worth $650 for non-elite members as a cardholder perk. Other cardholder benefits include a free checked bag, a fee credit for Global Entry or TSA PreCheck membership, priority boarding and priority airport check-in. Interestingly enough, this card also grants 10,000 Elite Qualification Miles (EQMs) after spending $40,000 on your card within a calendar year.

    Cardholders who are a few thousand EQMs short of earning elite status and have already spent close to the spending threshold required on their card for the year might be able to get over the edge by paying a tax bill. Depending on how valuable the benefit is, the fee required may be worth it.

    After all, AAdvantage Executive Platinum status, the top tier status of this frequent flyer program, comes with four one-way system wide upgrades each year, complimentary auto-requested upgrades, a 120% elite mileage bonus, complimentary Main Cabin Extra and Preferred seats, three free checked bags and other perks.

    Many cards have spending thresholds for an annual benefit.


    You Can Pay Taxes With Your Credit Card, But Should You?

    We've gone through the "how" but before paying taxes on a credit card, it's important to focus on the "why." Here are some prompts to think about whether paying taxes on a credit card makes sense:

  • Do you need more time to pay your taxes? If you do, the answer may be yes no matter what other considerations come into play. This is especially true if you have a 0% APR offer that you can utilize to buy you some time. The fee you pay for using plastic payment may seem tiny compared to a tax penalty or a high interest rate.

  • What rewards will you receive? If you have a card that pays a 2% or higher rate of return, you will at least break even with most of the services that handle credit card payments.

  • Do you have a large minimum spend requirement to meet to earn a welcome bonus? If you have a card that has a large spending requirement, it might be worth knocking out a large amount of that spending in one go, even if there are fees involved. Missing out on the welcome bonus will cost you much more than the fees charged.


    Best Credit Cards for Tax Payments

    It's easy to see how it's possible to come out ahead by paying taxes with a credit card, but it's crucial to choose the right credit card to do so. There's nothing wrong with going after a few big welcome bonuses, but it's also okay to focus on accruing ongoing rewards. And let's not forget about the potential to avoid interest on your tax bill for a year or longer.

    Here are some of the absolute best credit cards to use for tax payments with all those goals in mind.

    For the Welcome Bonus:

    The Platinum Card from American Express: The Platinum Card from American Express currently has the following welcome offer: Earn 75,000 Membership Rewards Points after you spend $5,000 on purchases on your new Card in your first 6 months of Card Membership. Plus, earn 10x points on eligible purchases on your new Card at U.S. Gas Stations and U.S. Supermarkets, on up to $15,000 in combined purchases, during your first 6 months of Card Membership. That's an additional 9 points on top of the 1 point you earn for these purchases.

    Cardholders also earn 5 Membership Rewards points per dollar spent on flights booked directly with airlines or with American Express Travel, capped at the first $500,000 in spending each calendar year. Prepaid hotels booked through American Express Travel earn an uncapped 5 points per dollar. All other purchases earn 1 Membership Reward point per dollar spent.

    There's a $550 annual fee (see Rates and Fees), but cardholders receive up to $200 in Uber Cash credits for eligible domestic Uber expenses each year when they link their Platinum card to their Uber account, Priority Pass airport lounge membership with enrollment, access to American Express Centurion Lounges, access to Delta SkyClubs when flying Delta same-day, a credit for Global Entry or TSA PreCheck, Hilton and Marriott Gold status with enrollment and more.

    Chase Sapphire Preferred Card: The Chase Sapphire Preferred Card is one of the top travel credit cards each year, and for good reason. Earn 80,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. That's $1,000 when you redeem through Chase Ultimate Rewards. Plus earn a $50 statement credit towards grocery store purchases within your first year of account opening.

    Cardholders earn 2 Ultimate Rewards points per dollar spent on travel and dining at restaurants worldwide, eligible delivery services, takeout and dining out and 1 point per dollar spent on all other purchases. A $95 annual fee applies.

    For the Ongoing Rewards:

    Blue Business Plus Credit Card from American Express: The Blue Business Plus Credit Card from American Express lets cardholders earn 2 Membership Rewards points per dollar spent on the first $50,000 spent each year, then 1 Membership Reward point per dollar. This card doesn't charge an annual fee, and also offers an introductory APR of 0% on purchases for 12 months from date of account opening, followed by an APR of 13.24% - 19.24% Variable based on creditworthiness and other factors at account opening (see Rates and Fees).

    Citi® Double Cash Card: The Citi Double Cash Card offers cardholders 2% back for each dollar spent — 1% when making a purchase and another 1% when paying the card off. There's no annual fee, and the card also offers an APR of 0% intro for 18 months on Balance Transfers, followed by a variable APR of 13.99% - 23.99% (Variable) based on your creditworthiness. A 3% balance transfer fee (minimum $5) applies.

    For 0% Introductory APR:

    Capital One Quicksilver Cash Rewards Credit Card: The Capital One Quicksilver Cash Rewards Credit Card starts consumers off with a the ability to earn a welcome bonus: One-time $200 cash bonus after you spend $500 on purchases within 3 months from account opening. Cardholders also earn a flat 1.5% back for each dollar spent, and have a $0 annual fee. Finally, this card offers 0% intro on purchases for 15 months, followed by an ongoing APR of 15.49% - 25.49% (Variable) based on creditworthiness.

    Wells Fargo Propel American Express Card: Also consider the Wells Fargo Propel American Express Card, which offers a 0% Intro APR on purchases for 12 months and 0% Intro APR on balance transfers for 12 months, followed by a variable APR of 14.49% - 24.99% Variable APR on purchases and balance transfers based on creditworthiness. This card also offers a welcome bonus: 20,000 bonus points when you spend $1,000 in purchases in the first 3 months — a $200 cash redemption value.

    Cardholders also earn 3 points per dollar spent on dining, gas, rideshares, transit, flights, hotels, homestays, car rentals and popular streaming services, plus 1 point per dollar on all other purchases. Best of all, there's no annual fee.


    Pitfalls to Avoid

    Paying taxes with a credit card can definitely be worth it, but for those who aren't careful, it can lead to financial wreckage. Here are the major pitfalls to watch out for any time using a credit card for a large purchase seems to be worthwhile:

  • Astronomical interest charges: The average credit card charges an APR over 17%, which is considerably higher than with other types of loan. That's why, by and large, it's important to only pay taxes with a credit card when there's cash in the bank to cover the bill in full. Any interest charges accrued will quickly eat into the value of rewards earned.

  • Long-term debt: Remember that life happens. A lot can go wrong in the short amount of time between paying taxes with credit and the credit card bill arriving in the mail. Avoid long-term debt by having an emergency fund that can cover a sudden loss in income, a surprise medical bill or an emergency home repair.

  • 0% APR Offer expiration: There's nothing wrong with taking advantage of a 0% APR credit card, but remember that these offers are only good for a limited time. Have a plan in place to pay off all charges, including tax payments, before the credit card's introductory offer ends and the rate resets to a much higher variable rate.

  • Comments on Facebook