As tax time rolls around, it’s tempting to consider using your credit card to pay the bill. But charging your taxes has inherent dangers. The IRS uses a third-party provider to process credit card payments — and sticks you with the bill. If you have a rewards card, you may think the reward justifies the expense, but you should consider if the benefit you earn is really worth it.
If you wait until the last minute to pay your taxes or you don’t have the cash on hand, paying with your credit card may be your only option. But you should be aware of the convenience fee that you will be charged for using your credit card. The convenience fees are on a scale, so the percentage changes according to how much you owe the IRS.
For example, if you owe the IRS $6,000, expect to pay a 2.35% fee. This turns your $6,000 bill into a $6,141 bill. A $2,000 tax bill turns out to be $2,047. Then, if you don’t pay off the balance when the credit card bill comes due you’ll have to add the interest cost, which really increases your tax bill.
Rewards vs. Disadvantages
For credit cardholders that think the rewards they will earn on the card will outweigh the convenience fees and interest, think again. The average rewards credit card pays only a penny for each dollar spent. This is far less of a reward than the 2.35% minimum you can expect to pay. Even if the credit card pays 2% cash back in rewards, you are still below the amount you are going to pay in fees.
The bottom line is that if you can, it is better to find another way to pay your tax bill. The IRS offers a myriad of other options. Using a debit card or even setting up an installment plan could be a better deal.