Paying taxes with your credit card in 2021
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The deadline to pay your taxes is right around the corner. Tax returns in the U.S. are usually due on April 15. As this past year has been such a challenge for many due to the ongoing pandemic, the IRS decided to extend the deadline for individual taxpayers to May 17, 2021, without penalties and interest regardless of the amount owed. And a few states have deadlines even longer than that.
Those with a looming tax bill may be wondering if it is worth it to charge that bill to a rewards earning credit card to earn cash back or travel rewards. A tax bill can even be a way to meet the minimum spend requirements on a generous sign-up bonus. This strategy of paying your tax bill with a credit card can translate to thousands of dollars in travel rewards or cash back, but there are some things to know before you pay.
The best credit cards for tax payments
- The Business Platinum Card® from American Express: Best for earning a large welcome bonus
- 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
- Chase Sapphire Preferred Card: Best starter travel rewards card
- Capital One Venture Rewards Credit Card: Best personal card for straightforward rewards
- Capital One Spark Miles for Business: Best business card for straightforward rewards
The information on the Discover it Miles has been collected independently by The Points Guy. The card details on this page have not be reviewed or approved by the issuer.
Here’s what you need to know about paying taxes with a credit card in 2021.
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Comparing different ways you can pay your taxes
If you owe taxes to the IRS, there are several ways to make your payments:
- You can make a direct payment from your bank account and there are no fees imposed for the transaction.
- You can wire the money from a bank account, although this option will almost certainly incur a fee.
- You can mail a money order to the IRS.
If you need to buy a little more time to pay your taxes, you can file an extension with the IRS or set up an installment agreement that includes a payment plan. You will, however, be expected to pay penalties and interest on the aforementioned payment plan. You can also pay your taxes with a debit card and while the fee is minimal, you won’t earn any valuable travel rewards or cash back.
Fortunately, the IRS lets you pay your tax bill with a credit card through several third-party payment processors, but be warned — these companies are allowed to tack on fees unto your payments. You can see a list of these companies and their convenience fees at this link to the IRS website.
The cost of paying taxes with a credit card
When you use a credit card to pay your taxes, the fee is calculated as a percentage of the amount paid. Currently, those fees range from 1.96% to 1.99%.
In the past, the three payment processors charged different fees depending on the payment network the card belonged to, with American Express cards being charged a slightly higher fee. In recent years, they changed the fee structure, so now all payment networks are charged the same.
The benefits of paying taxes with your credit card
Paying your taxes with a credit card can help you earn rewards and give you more time to pay off a high tax bill. While this method is certainly the costliest way to pay your taxes, it can be the most rewarding approach.
Earn a generous credit card sign-up bonus/welcome offer
Many card issuers offer a sign-up bonus/welcome offer if you spend a certain amount on your card within a specific time frame. This bonus can be worth thousands of dollars and come in the form of cash back or travel rewards for your account. Some of these bonuses are huge and can actually go north of $1,000 in value each.
The most advantageous reason to use a credit card when paying a sizeable tax bill is to earn an abundance of rewards for that spend. Since there are no credit cards that offer bonus earnings on tax payments, signing up for a card with a generous sign-up bonus or welcome offer is the simplest way to rack up tons of points or miles on your tax bill payment.
Some travel rewards cards have especially high minimum spending requirements for earning a bonus.
For example, the Ink Business Preferred Credit Card has an elevated offer where new applicants can earn 100,000 Chase Ultimate Rewards points after spending $15,000 on purchases within three months of account opening. And the Amex Business Platinum has a special offer for TPG readers of 125,000 Membership Rewards® points after spending $15,000 on eligible purchases with the Business Platinum card within the first three months of card membership.
Spending $15,000 in three months might be tough for some small business owners. But if you put your tax payment on your card to earn the 125,000-point bonus on the Amex Business Platinum, you could pay as little as $294 in fees (through PayUSAtax). According to TPG’s latest valuations, American Express Membership Rewards are worth 2 cents apiece if you maximize the points via transfer partners, so you’d be earning up to $450 in travel rewards potentially on your $15,000 tax bill payment — a slight profit when compared to the fees you pay. That said, you usually only come out clearly ahead using a card to pay taxes if you are triggering a larger bonus at the same time that you are earning daily rewards.
If you think you’re going to have trouble paying your balance in full before accruing interest, avoid using a credit card altogether to pay your taxes as the interest and fees will stymie any rewards earned.
Meet credit card spend threshold
Many credit cards offer benefits once you reach a particular spending threshold. These might be based on the calendar year or your cardmember anniversary, but in either case, making large tax payments could help you earn these rewards when that amount of spending might be out of range. For example:
- Spend $15,000 on the Hilton Honors American Express Surpass® Card or The Hilton Honors American Express Business Card in a calendar year to earn a free weekend night certificate.
- Earn an additional free night award at any Category 1-4 Hyatt hotel or resort if you spend $15,000 on your World of Hyatt Credit Card in a calendar year.
Use multiple cards to maximize earnings
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. Reports also indicate that you can use multiple payment processors for the same tax period.
For example, say that you have a $30,000 tax payment due. You can apply for both The Business Platinum Card® from American Express and the Ink Business Preferred Credit Card. By putting $15,000 on the Amex Business Platinum Card, you’d have spent enough to earn the 125,000-point welcome bonus. Plus, since the purchase is more than $5,000, you’d earn 1.5x points on the purchase (up to 1 million additional points per calendar year) which means you’d earn 22,500 points. Then you can charge the additional $15,000 balance due on the Ink Business Preferred to earn the 100,000-point sign-up bonus.
Buy some extra time to pay your taxes
One of TPG’s 10 commandments for earning credit card rewards is never to pay interest charges. It’s paramount that you never bite off more than you can chew. When paying your taxes with a credit card, make a note of when the first day of your new statement period begins on the card you’re looking to use. This way, you may have up to 30 days until your statement closes and close to 60 days until you need to pay off your balance in full.
Some credit cards even offer 0% APR for an introductory period on new purchases, which equates to 12-15 months of interest-free payments on your tax bill. But you must pay off the entire balance in full before the promotional period ends or risk exorbitant interest charges.
The downside of using a credit card to pay your taxes
Despite the benefits listed above, using a credit card to pay your taxes can be a reckless strategy, as the interest rate on most rewards credit cards can severely hurt your finances. If charging taxes to your credit card will make you unable to pay your statement balance in full, don’t even think about it. This is then not a viable method to paying taxes for you.
Instead, consult your tax professional about your options. The IRS offers payment plans with lower interest rates than most credit cards which you may qualify for.
Comparison of the best credit cards for tax payments
|The Business Platinum Card from American Express||1 Amex point per dollar. Terms Apply.||3%||1.04%||50% points bonus on transactions over $5,000 (up to 1 million additional points per calendar year)|
|The Blue Business Plus Credit Card from American Express||2x Amex points per dollar (on the first $50,000 in purchases each calendar year; then 1x) Terms Apply.||4%||2.04%||2x earning, limited to $50k in purchases per calendar year, then 1x.|
|Chase Freedom Unlimited||1.5% cash back||3%||1.04%||Points value by transferring to an Ultimate Rewards-earning card|
|Ink Business Unlimited Credit Card||1.5% cash back||3%||1.04%||Points value by transferring to a UR-earning card|
|Discover it Miles||1.5 miles per dollar||3%||1.04%||After first-year cardholder match|
|Chase Sapphire Preferred||1 Chase point per dollar||2%||0.04%||n/a|
|Capital One Venture Rewards Credit Card||2 Capital One miles per dollar||3.4%||1.44%||n/a|
|Capital One Spark Miles for Business||2 Capital One miles per dollar||3.4%||1.44%||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: PayUSAtax.com, with a 1.96% 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 1.5x Membership Rewards points on purchases that exceed $5,000 (up to 1 million additional points per calendar year). 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 1.04 cents after the 1.96% convenience fee. But considering the card is currently offering a welcome bonus for TPG readers of 125,000 points after you spend $15,000 in the first three months you have the card, the advantages of using the Amex Business Platinum on your taxes this year could outweigh the higher returns from other cards. The card has a $595 annual fee (see rates and fees).
This card offers 2x points on all purchases for the first $50,000 spent each calendar 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 2.04 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 1.96% fee to pay taxes using this card. However, if you (or your spouse or domestic partner) have an Ultimate Rewards-earning Chase credit card such as the Chase Sapphire Preferred Card, Chase Sapphire Reserve or the Ink Business Preferred Credit Card, you can convert these 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 1.04 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 0.29 cents per dollar paid after subtracting the 1.96% 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 means you’d lose money after paying the 1.96% 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. Like the Chase 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 for the first year, although you will have to wait a year for the second half of this cash back.
While you’ll only earn 1 point per dollar spent on paying your taxes with the Chase Sapphire Preferred, this popular card makes the cut because of its long-term value and whopping sign-up bonus. You’ll earn an impressive 100,000 bonus points after you spend $4,000 on purchases in the first three months from account opening. The sign-up bonus alone is worth a $2,000 return in travel rewards, per TPG’s most recent point valuations.
Related: Chase Sapphire Preferred card review
Now that Capital One added new travel partners, their value has vaulted to 1.7 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 3.4 cents in value per dollar spent. This equates to up to 1.44 cents per dollar spent in net value after the 1.96% fee. Plus, for a limited-time, new Capital One Venture Rewards cardholders can earn 100,000 bonus miles after spending $20,000 on purchases within the first 12 months of account opening or still earn 50,000 miles if you spend $3,000 on purchases in the first 3 months.
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 1.44 cents per dollar spent in net value after the convenience fees.
Other cards to consider
While there are plenty of great choices above, these are a few alternative cards that might work well for your situation.
This card offers you 1.5 points per dollar spent on all purchases and 2 points per dollar on travel and dining purchases. Plus, earn 2 points for every $1 spent on grocery store purchases- now through 12/31/21. 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 member, 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 0.665 cents per dollar spent.
This card earns 2% cash back (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 slight cash profit no matter which payment provider you use. Even better, this card doesn’t have an annual fee.
Related: The best cash-back credit cards
There are solid options when it comes to paying your taxes using a credit card. We’ve also outlined the cost to do it. If you choose to pay your taxes with your credit card, it can be a lucrative way to earn points and miles. But do your own math and make sure the cost is worth the benefit.
For rates and fees of the Amex Business Platinum card, click here.
Additional reporting by JT Genter and Madison Blancaflor.
Featured photo by PeopleImages/Getty Images.
Updated on 5/12/21.
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