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Update: The Hilton American Express Ascend Card is now the Hilton Surpass® Card from American Express and is offering a limited-time bonus of 130,000 bonus points + a free weekend night through August 28, 2019.
While many Americans have to make a tax payment to the IRS on April 15, most freelancers, side-hustlers and self-employed works have to make four estimated quarterly tax payments this year, with the first one on January 15. And if 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 the costs and details of paying taxes with your credit card have changed over the past few years, as have the best cards for doing so. In this post, I’ll take a fresh look at the best ways to pay your taxes with a credit card.
The Different Ways You Can Pay Your Taxes With a Credit Card
If you owe taxes to the federal government, there are several ways to make your payments. 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 “convenience fees” on your payments. You can see a list of these companies and their convenience fees at this link to the IRS website.
When you pay with a debit card, there’s a flat fee, which is currently between $2 and $3.95, depending 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 one of the least expensive options, as the fee will always be less than $4.
One advantage of paying by debit card (or credit card) is that you’ll 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. Unfortunately, there aren’t any debit cards remaining that will offer you rewards for this type of transaction (the Delta SkyMiles debit card from SunTrust only offers rewards for PIN- or signature-based transactions, which doesn’t apply to online tax payments).
When you use a credit card to pay your taxes, the fee imposed will be much higher than if you use a debit card. The credit card convenience 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.
Last year, all three of the authorized payment processors also began accepting payments using digital wallet services. All three accept American Express Checkout and Visa Checkout, while PayUSAtax.com also accepts Android Pay and Samsung Pay. Both Pay1040.com and PayUSAtax.com accept MasterPass.
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 your check, the envelope and your postage. Also, the IRS will credit your payment on the date that the envelope is postmarked, regardless of when it’s actually 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 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 rewards — Just as with any other charge made to your card, you can earn rewards for your tax payments. However, 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.
- Qualify for a credit card bonus — Some travel rewards cards have especially high minimum spending requirements for earning a sign-up bonus. For example, the Ink Business Preferred Credit Card from Chase is offering new applicants 80,000 Ultimate Rewards points after they spend $5,000 within the three months of account opening. Spending $5,000 in three months isn’t doable for all card holders, 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 80,000 points. That works out to paying 0.12 cents per point, which is a bargain. According to TPG’s latest valuations, Chase Ultimate Rewards are worth 2 cents each, so it’s well worth it to pay less than a two tenths of a cent in fees for each point
- 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 card member anniversary, and in either case making large tax payments could help you earn these rewards. For example, the JetBlue Plus Card offers Mosaic elite status after card holders spend $50,000 in a calendar year, and the Hilton Honors Ascend Card from American Express lets you earn a complimentary weekend night from Hilton Honors after you spend $15,000 in a calendar year, and gives you top-tier Diamond status when you spend $40,000 on eligible purchases in a calendar year.
- Enjoy some free float on your tax payment — One important rule for earning credit card rewards is to always avoid interest charges by paying your entire statement balance in full. When you do so, you’ll receive what amounts to a free loan. Pay just before your statement closes, and you’ll have 21 to 25 days before your due date (depending on your card’s grace period). But if you pay your taxes just after your statement cycle closed, you will have an additional 30 days until your due date, for a total of 51 to 55 days. Furthermore, some credit cards offer interest-free financing on new purchases. For example, the Amex EveryDay Preferred Card offers new cardmembers 12 months of interest-free financing on both new purchases and balance transfers, and the latest offer has no fee for balance transfers.
- Gain a little bit of extra leverage — Let’s face it: Credit card issuers profit from merchant fees (which are passed on to you in this case as convenience fees). If you have a card that you use very infrequently, then you aren’t a very valuable customer. But if you’re able to make occasional large charges like tax payments, then your card issuer may be more likely 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
It’s rarely a good idea to finance your tax liability with your credit card. 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 adviser about creating a payment plan with the IRS, which will offer lower interest rates than the standard rate of nearly any credit card.
The Best Travel Rewards Credit Cards to Use for Tax Payments
Here are the top cards to pay your taxes with this year. I’ve included the net gain in rewards you can earn from each based on paying through 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, your gains would be even greater.
The Blue Business℠ Plus Credit Card from American Express — This card offers 2x points on all purchases for the first $50,000 spent each year; then 1x thereafter. Since we value 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 3.13 cents per dollar charged.
Chase Freedom Unlimited — This card offers you 1.5% cash back on purchases, but you could also transfer the cash-back rewards to your (or your spouse or domestic partner’s) Chase card accounts like the Chase Sapphire Preferred Card, Chase Sapphire Reserve or the Ink Business Preferred Credit Card to redeem them as Ultimate Rewards points. You can then transfer points from these accounts to 13 different travel partners. Points redeemed from the Sapphire Preferred and the Ink Business Preferred are worth 1.25 cents each for travel reservations made through the Chase travel portal, while points from the Sapphire Reserve are worth 1.5 cents apiece toward travel reservations. According to TPG’s valuations, Ultimate Rewards points are worth 2 cents each, so you end up with 3 cents in value. This is a net gain of up to 2.13 cents per dollar.
Ink Business Unlimited Credit Card — This is basically the small business version of the Freedom Unlimited, and it also offers you 1.5% cash back as 1.5 Ultimate Rewards points per dollar spent. And like the Freedom Unlimited, it has no annual fee.
Discover it® Miles — 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, although you will have to wait a year for the second half. Therefore, this card offers a net 1.13-cent gain per dollar spent, after the 1.87% fee.
Amex EveryDay® Preferred Credit Card from American Express — 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. The information for the Amex EveryDay Preferred Card has been collected independently by The Points Guy. The card details on this page have not been reviewed or provided by the card issuer.
The Business Platinum® Card from American Express — This card offers 1.5x Membership Rewards points on purchases that exceed $5,000. Based on TPG’s valuations, this equals 3 cents in value per dollar spent, for a net gain of 1.13 cents after the 1.87% convenience fee.
Capital One Venture Rewards Credit Card — Now that Capital One miles can be transferred to airline partners, their value has vaulted to 1.4 cents each (based on TPG valuation). And since you earn double miles on all non-bonus 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.
Capital One Spark Miles for Business — Like the Venture Rewards card, this small business card offers 2x miles on all non-bonus purchases, which can be redeemed for travel statement credits or transferred 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.
Bank of America Premium Rewards credit card — 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% – 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 0.75 cents per dollar spent..
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