Paying taxes with your credit card in 2020
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While the only tax deadline that most Americans know is April 15, freelancers, side-hustlers and self-employed workers have to consider making estimated quarterly tax payments four times each year. And the last of the four quarterly payments for 2019 is due to the IRS on Jan. 15, 2020.
If you need to make an estimated tax payment and you’re an award travel enthusiast, you’ve probably at least considered paying taxes with your credit card to earn valuable points and miles.
But you’re also probably aware that there’s a cost for doing so. These fees and the rewards that you can earn have changed over the past few years. In this post, I’ll take a fresh look at the best ways to pay your taxes with a credit card.
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Comparing the different ways you can pay your taxes
If you owe taxes to the federal government, there are several ways to make your payments. In addition to accepting checks by mail, the IRS authorizes just three different companies to accept payments on its behalf via debit or credit card.
However, these companies are permitted to impose fees on your payments. You can see a list of these companies and their convenience fees at this link to the IRS website.
Paying by credit card
When you use a credit card to pay your taxes, the credit card fee is calculated as a percentage of the amount paid. Currently, those fees range from 1.87% to 1.99%.
In the past, these payment processors charged different fees depending on the payment network the card belonged to, with American Express cards being charged a higher fee. But in recent years, each of these payment processors began charging the same fee for all cards, regardless of the payment network your credit card belongs to.
In addition to entering your credit card number, all three of the authorized payment processors now accept payments using digital wallet services. All three accept American Express Checkout and Visa Checkout. Both Pay1040.com and PayUSAtax.com accept MasterPass. And PayUSAtax.com accepts PayPal, Android Pay and Samsung Pay.
Paying with a debit card
When you pay with a debit card, there’s a flat fee, which is currently between $2 and $3.95. The exact rate depends on which of the three payment processors you choose and — in the case of one company — whether your payment exceeds $1,000. Paying with a debit card is the least expensive option, as the fee will always be less than $4.
There’s not much of a benefit to paying by debit card. Unfortunately, there aren’t any debit cards remaining that will offer you rewards for this type of transaction. One of the last-remaining rewards debit cards is The Delta SkyMiles debit card from SunTrust, but it only offers rewards for PIN- or signature-based transactions — which wouldn’t apply to online tax payments.
However, there are two benefits to paying by debit card rather than check. First, you will receive an immediate receipt for payment — which can be important if you happen to be applying for a loan when you’ve reported a tax liability. It also eliminates the possibility of a check being lost in the mail.
Paying by check
Finally, you can always write a check and put it in the mail. This is the least expensive way to pay the IRS; there’s no fee, other than the cost of a check, the envelope and the postage.
If you mail a check, the IRS will credit your payment on the date that the envelope is postmarked, regardless of when the check is received or cashed. This can give you an extra day or two before the funds are debited from your account, but there’s no way to predict exactly how many. On the other hand, your check could get lost in the mail. And even if it doesn’t, you won’t have a receipt for payment until the check clears.
The benefits of paying taxes with your credit card
Using your credit card will always be the most expensive way to make federal tax payments, but it offers several advantages:
Earn credit card rewards
Just as with any other charge made to your card, you can earn rewards for your tax payments. There aren’t any cards that offer bonuses specifically for these types of payments. A few years ago, the fees applied would almost always exceed the value of the rewards earned. But credit cards and loyalty programs have steadily increased the value of the rewards offered, while convenience fees have come down slightly.
And you don’t have to worry about the charge being processed as a cash advance. Each of the major processors clearly states that the charge is processed as a purchase. So, you’re sure to earn rewards and avoid nasty cash-advance fees.
Knock out a credit card welcome bonus
Some travel rewards cards have especially high minimum spending requirements for earning a welcome bonus. For example, the Ink Business Preferred Credit Card is offering new applicants 80,000 Chase Ultimate Rewards points after they spend $5,000 on purchases within the three months of account opening.
Spending $5,000 in three months might be tough for some small business owners. But if you need to put your tax payment on your card to earn the 80,000-point bonus, you could pay as little as $93.50 in fees (through Pay1040.com) to receive a total of 85,000 points. That works out to paying just 0.11 cents per point. According to TPG’s latest valuations, Chase Ultimate Rewards are worth 2 cents each, so it’s well worth it to pay almost one-tenth of a cent in fees for each point — even if you don’t maximize your Ultimate Rewards.
Meet credit card spending thresholds
Many credit cards offer benefits once you reach a particular spending threshold. These might be based on the calendar year, or your cardmember anniversary, and in either case making large tax payments could help you earn these rewards. For example:
- Spend $15,000 on the Hilton Honors American Express Surpass® Card or Hilton Honors American Express Business Card in a calendar year to earn a free weekend night certificate.
- The JetBlue Plus Card offers Mosaic elite status after cardholders spend $50,000 in a calendar year.
Split your payment among multiple cards
If you have a large tax bill, you don’t have to put the entire spend all on one credit card. Each of the three tax payment processors allows taxpayers to make two separate payments per tax period, and reports indicate that you can use multiple payment processors for the same tax period.
For example, say that you have a $25,000 tax payment due. You can sign up for both The Business Platinum® Card from American Express and the Ink Business Preferred Credit Card. By putting $20,000 on the Amex Business Platinum Card, you’d be able to earn the up to 75,000-point welcome bonus after spending $20,000 total in purchases in the first three months of account opening. Plus, since the purchase is over $5,000, you’d earn 1.5x points on the purchase for an additional 30,000 points. Then you can charge the additional $5,000 balance due on the Ink Business Preferred to earn the 80,000-point welcome bonus.
By doing this, your $25,000 tax payment could net you a total of 190,000 points — worth $3,800 according to TPG valuations — for $468 in fees. That certainly takes the sting out of a hefty tax bill.
Enjoy some free float on your tax payment
One of TPG’s 10 commandments for earning credit card rewards is to always avoid interest charges by paying your entire statement balance in full. Still, you’ll receive what amounts to a free loan. Depending on when your statement closes, you’ll have up 30 days between the time of your tax payment and when your statement closes. Then you’ll have 21 to 25 days before your due date — depending on your card’s grace period — to make an on-time payment.
Some credit cards even offer interest-free financing on new purchases. For example, the Amex EveryDay® Preferred Credit Card from American Express offers new cardmembers 0% intro APR on purchases; 12 months of interest-free financing on both new purchases and balance transfers, and the latest offer has no fee for balance transfers, then thereafter there’s a variable APR, 14.49% to 24.49%.
The information for the Amex EveryDay Preferred has been collected independently by The Points Guy. The card details on this page have not been reviewed or provided by the card issuer.
Gain a little bit of extra leverage
It’s important to remember that credit card issuers profit from merchant fees — which are largely passed on to you in this case as convenience fees. If you have a card that you use very infrequently, then the bank may not consider you a valuable customer. But you might be able to turn that around by making a large charge like a tax payment. When you’re in the good graces of the credit card issuer, you may get them to waive your annual fee, offer you a retention bonus or grant you other considerations. There are no guarantees, but it certainly won’t hurt.
Drawbacks of using a credit card to pay your taxes
Despite the benefits listed above, financing a tax payment using a credit card an awful strategy as the interest rate on most rewards credit cards can be significant. If charging taxes to your credit card will make you unable to pay your statement balance in full, then don’t do it.
Instead, consult your accountant or tax advisor about your options. You may be able to create a payment plan with the IRS with lower interest rates than the interest rate on most credit cards.
The best credit cards for tax payments
- The Blue Business® Plus Credit Card from American Express: Best for small businesses
- Chase Freedom Unlimited: Best for consumers with an Ultimate Rewards-earning card
- Ink Business Unlimited Credit Card: Best for businesses with an Ultimate Rewards-earning card
- Discover it® Miles: Best for cash back during the first year
- Amex EveryDay® Preferred Credit Card from American Express: Best for cardmembers who make 30+ transactions per month
- The Business Platinum® Card from American Express: Best for earning a significant welcome bonus
- Alliant Visa Signature Card: Best for cash back in the first year and beyond
- Capital One® Venture® Rewards Credit Card: Best personal card for straightforward rewards
- Capital One® Spark® Miles for Business: Best business card for straightforward rewards
Comparison of the best credit cards for tax payments
|Credit Card||Earning Rate||Potential
|The Blue Business Plus Credit Card from American Express||2x Amex points per dollar||4%||2.13%||2x earning limited to $50k in purchases per year, then 1x|
|Chase Freedom Unlimited||1.5% cash back||3%||1.13%||Points value by transferring to an UR-earning card|
|Ink Business Unlimited Credit Card||1.5% cash back||3%||1.13%||Points value by transferring to an UR-earning card|
|Discover it Miles||1.5x miles per dollar||3%||1.13%||After first-year cardholder match|
|Amex EveryDay Preferred Credit Card from American Express||1x Amex points per dollar||3%||1.13%||50% points bonus for making 30+ transactions|
|The Business Platinum Card from American Express||1x Amex points per dollar||3%||1.13%||50% points bonus on transactions over $5,000|
|Alliant Visa Signature Card||2.5% cash back||3%||1.13%||3% cash back on purchases made in the first year|
|Capital One Venture Rewards Credit Card||2x Capital One miles per dollar||2.8%||0.93%||n/a|
|Capital One Spark Miles for Business||2x Capital One miles per dollar||2.8%||0.93%||n/a|
For these top cards, I’ve listed the general earning rate for the card. The potential return is the potential earnings based on TPG valuations and maximizing the earning through the method mentioned in the “caveat” column. The net after-fee rate uses the potential return column and subtracts the processor that charges the lowest fee: Pay1040.com, with a 1.87% charge.
If you’re able to claim your convenience fees as a tax deduction on your business — please speak with your tax advisor about this possibility — your gains would be even greater.
This card offers 2x points on all purchases for the first $50,000 spent each year; then 1x thereafter. Since TPG values Membership Rewards points at 2 cents each, this works out to a fantastic 4 cents in value per dollar, for a strong net gain of 2.13 cents per dollar charged.
This card offers you 1.5% cash back on purchases, so it wouldn’t seem to make sense to pay a 1.87% fee to pay taxes using this card. However, if you (or your spouse or domestic partner) have an Ultimate Rewards-earning Chase credit card like the Chase Sapphire Preferred Card, Chase Sapphire Reserve or the Ink Business Preferred Credit Card, you can convert this cash-back earnings to Ultimate Rewards points. Then, you can transfer points from these accounts to 13 different travel partners.
TPG pegs the value of Ultimate Rewards points at 2 cents each. The ability to earn 1.5x points means that you’ll get 3 cents in value per dollar spent on purchases. This is a net gain of up to 1.13 cents per dollar paid.
Alternatively, you can use these points toward travel reservations through the Chase travel portal. Points redeemed through the Chase Sapphire Reserve are worth 1.5 cents apiece toward travel reservations. Since you earn 1.5x points per dollar spent through the Chase Freedom Unlimited, that means you can get 2.25 cents per dollar spent toward travel reservations through the portal. That’s a net gain of 0.38 cents per dollar paid after subtracting the 1.87% fee.
Points redeemed from the Chase Sapphire Preferred and the Ink Business Preferred are only worth 1.25 cents each toward travel reservations made through the Chase travel portal. Multiplying this redemption rate by the 1.5x points you’ll earn on purchases only nets 1.875 in value per dollar spent. That’s barely breakeven after paying a 1.87% fee.
This is practically the small-business version of the Chase Freedom Unlimited, and it also offers you 1.5% cash back — which you can convert to 1.5 Ultimate Rewards points per dollar spent. And like the Chase Freedom Unlimited, it has no annual fee.
This card offers 1.5 miles per dollar spent, and miles are worth one 1 cent each toward travel statement credits or as a direct deposit in your bank account. After the first year of your account, Discover will match your first year’s rewards. This equates to a total of 3% in value for the first year, although you will have to wait a year for the second half of this cash back. Once you get the cash back match, you’ll get a 1.13 cent profit per dollar spent after the 1.87% fee.
This card offers just 1 Membership Rewards point per dollar spent, but it also features a 50% points bonus when you use it more than 30 times during a statement cycle. TPG currently values these points at 2 cents each, so the rewards you earn are worth 3 cents per dollar when you earn the 50% bonus. This equates to a net return of up to 1.13 cents per dollar after the 1.87% fee.
This card offers 1.5x Membership Rewards points on purchases that exceed $5,000. Based on TPG’s valuations of 2 cents per Membership Rewards point, this equals 3 cents in value per dollar spent, for a net gain of 1.13 cents after the 1.87% convenience fee.
Alliant Visa Signature Card
Alliant Credit Union members can sign up for the Alliant Visa Signature Card to earn 3% cash back on all purchases the first year and 2.5% cash back on purchases after that. Those are solid cash-back earning rates that make it a no-brainer to pay your taxes with a 1.87% fee.
Now that Capital One miles can be transferred to airline partners, their value has vaulted to 1.4 cents each (based on TPG valuation not provided by the issuer). And since you earn 2x miles on all purchases with this card, that equates to a return of 2.8 cents in value per dollar spent. This equates to up to 0.93 cents per dollar spent in net value.
Like the Venture Rewards card, this small business card offers 2x miles on all purchases, which you can redeem for travel statement credits or transfer to mileage partners. Therefore, it offers the same return as the Venture card of up to 0.93 cents per dollar spent in net value, after the convenience fees.
Other cards to consider
While there are plenty of great choices above, there are some cards that might work well for your situation.
This card offers “3x points per $1 for eligible net mobile wallet purchases when you use your card with your mobile device to pay through Apple Pay®, Google Pay™ and Samsung Pay,” and PayUSAtax.com accepts Samsung Pay. With points worth 1.5 cents toward travel purchases, this card should be the runaway winner with 4.5% return per dollar spent. That’s 2.54% net profit after PayUSAtax.com’s higher 1.96% fee.
However, online reports indicate that PayUSAtax processes these payments through Visa Checkout instead of Samsung Pay — meaning the purchase isn’t eligible for the 3x earnings. So, if you’re considering using this card, you may want to test a small payment to see how it codes before processing a large payment and expecting to get 3x.
This card offers you 1.5 points per dollar spent on all purchases and 2 points per dollar on travel and dining purchases. Points are worth 1 cent each toward travel statement credits, so paying taxes with this card is a money-loser for most people. But if you’re a Bank of America Preferred Rewards client, you can earn a 25% to 75% rewards bonus on every purchase. That means Preferred Rewards clients could earn between 1.875 and 2.625 points per dollar spent on your taxes, for a net gain of up to 0.76 cents per dollar spent.
Citi® Double Cash Card & other 2% cash back cards
This card earns 1% cash back on all purchases at the time of the purchase and another 1% cash back when you pay your balance. Earning a total of 2% cash back means that you’re sure to get a cash profit no matter which payment provider you use. Even better, this card doesn’t have an annual fee.
Similarly, there are other cash-back credit cards that you may have that could net you a small cash profit from paying your tax bill with a credit card — such as the Fidelity Rewards Visa Signature Card.
Related: The best cash-back credit cards
Sarah Silbert contributed to this post.
Featured photo by wutwhanfoto via Getty Images.
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