Want to take a bit of the sting out of paying taxes? Good news. You can easily and quickly pay taxes with a credit card AND simultaneously profit from doing so.
I didn’t know this was possible until about a year ago and I’ve been writing about personal finance for over 9 years. Add it to my “things I wish I had known sooner” bucket. I’m excited to share it with you today.
Should you Pay Taxes with your Credit Card?
First off – a mandatory disclaimer: you should only consider paying taxes with a credit card if you pay your card balances in full every month. If you do that, read on.
As I highlighted recently, you can pay your taxes online in 4 different ways – one of which is to pay via credit or debit card. Paying your taxes online is the preferred method of paying taxes, for the reasons I highlighted in that post.
But paying taxes with credit cards? At first glance, the costs of paying your taxes online with a credit card may seem prohibitive. Each of the 3 official credit card payment partners of the IRS charges a processing fee. And it’s not insignificant:
Fees range from 1.87% to 1.99%. With the lowest processing fee at 1.87%, I’ve only ever used pay1040.com, but that could change if one of the others lowers their processing fees. You can double check fees and start the payment process on the IRS credit card payment page.
1.87% is still fairly high – so how is it possible to profit, when you clearly need to surpass that fee with rewards earnings?
Profiting from a Cash Rewards Card
Theoretically, if you use pay1040.com (1.87% fee), any rewards credit card that rewarded 1.87%+ would result in a profit.
There are a few rewards cards that earn 2%, for example. But the rewards card with the best return, on cash back alone, is the Discover it® Miles card, with unlimited 1.5x rewards (“miles” can be redeemed for cash or travel credit later).
This card immediately earns 1.5% cash back on purchases, and then doubles all cash back earned during your 1st year of card membership, effectively giving you a 3% return on any payments made within the first year. And there is no annual fee to cut into that return.
Meeting Minimum Spend Requirements for Introductory Signup Bonuses
Another way to benefit by paying taxes with a credit card is it can allow you to meet lofty minimum spend requirements for large signup bonus from one of the many lucrative travel, air miles, hotel, and business credit cards that you may have recently applied for (usually required within the first 3 months of card membership). These bonuses can be hard to hit with everyday spend alone.
It’s not uncommon for cards to offer the equivalent of a $500 bonus for $3,000 in spend. That’s 16.66% cash back, assuming you’ve spent nothing on everyday expenses.
And on top of that, you would also get the normal rewards for using that card to make the payment (typically 1%).
Can you Deduct Credit Card Processing Fees?
There’s more good news. Are credit card processing fees tax deductible? It depends:
- Personal Taxes: credit card processing fees are deductible for personal tax types as “miscellaneous” itemized deductions. However, only those miscellaneous expenses that exceed 2% of your adjusted gross income can be deducted. For more information, refer to IRS Publication 529 on “miscellaneous deductions”. Update: this deduction disappears in 2018 through 2025 due to tax reform.
- Business Taxes: for business tax types (i.e. self-employment), credit card processing fees are a deductible business expense.
If you’re eligible, deducting credit card processing fees would add even more profit added to your bottom line.
Limit of Payments Per Processor:
If you paying taxes for your annual return, it is possible to make 2 payments with credit cards (according to this IRS payment frequency table). In practice, however, many have reported that these limits are actually per payment processor (in other words 3X that number, or 6 total). Your mileage may vary.
Paying Estimated Tax Payments with Credit Card
Additionally, if you have self-employment income, you can not only pay for your annual return with credit cards, but you can also pay estimated tax payments quarterly with credit cards as well. This ratchets up your opportunities to earn over the course of the year by 5X!
If you pay your card balances in full, paying your taxes with a credit card can result in a profit.
Oh, and by the way, this opportunity is another great reason why it’s better to owe on your taxes then receive a refund.