Should You Ever Pay Your Taxes With a Credit Card?

Whether you save your credit card for emergencies only or consider yourself an expert in racking up rewards, you know that using your credit card responsibly is key to keeping your finances in good shape. So when tax time comes around, the thought of charging your tax bill to a credit card might seem just plain wrong.

However, it might not be. Depending on your situation, as well as the potential fees, it might not be such a bad idea. Here’s how to tell for sure.

Is it Possible to Pay Taxes With a Credit Card?

The short answer is yes, but there are some things you should keep in mind before you hand over your credit card information.

According to Jennifer McDermott, head of communications and consumer advocate at savings website Finder.com, taxpayers might opt to pay their tax bill with a credit card for a number of reasons.

“This might be due to a lack of available funds at the time they are owed, with IRS late fees outweighing the credit card interest they would have to pay,” she says. “Or they might be part of the one in three Americans who use their credit card as a payment method purely for the points.”

[Read: Best Business Credit Cards of 2018.]

Whatever the reason, it will cost you.

Tricia Rosen, founder of fee-only financial planning firm Access Financial Planning LLC, says, “The IRS has agreements with approved credit card companies and there are set fees associated with using different vendors.”

The IRS provides a list of approved credit card processors, along with the requirements for paying with a debit card, credit card or digital wallet. These are the details for credit card payment processing fees:

Link2GovCorporation: 1.87 percent fee, minimum fee of $2.59

WorldPay US Inc.: 1.97 percent fee, minimum fee of $2.69

Official Payments Corp.: 1.99 percent fee, minimum fee of $2.50

There’s also the option to pay your taxes with a credit card via online tax preparation software including TurboTax and H&R Block. These services charge an even higher convenience fee, however — 2.49 percent for TurboTax but can reach 3.93 percent for others, according to McDermott.

“However, you can use their services and pay separately using one of the IRS’ payment processors to avoid the higher convenience fees, as filing and paying are two separate actions,” she notes.

Pros and Cons of Charging Your Tax Bill to a Credit Card

Despite the cost, there are some benefits to charging your tax bill to a credit card:

Earn rewards: If you have a credit card that offers generous rewards, you might want to pay your tax bill with the card to rack up points and then pay the balance immediately. Just be sure you’re earning rewards at a higher rate than the processing fee.

Meet a spending bonus: Similarly, if your credit card offers a rewards bonus for meeting a certain spending threshold after opening the account, on an annual basis or at the end of the year, your tax bill could be a large enough expense to get you there. Again, you’d need to pay the balance in a timely manner to avoid accruing interest and canceling out the value of the bonus.

Buy more time: If you recently took advantage of a zero percent APR offer, paying by credit card could be a great way to spread your payments out over time without being subject to IRS payment plan fees or credit card interest. The key, of course, is to pay off the balance before the introductory APR period is up.

[Read: The Best Credit Cards with High Credit Limits.]

On the other hand, there are potential downsides to paying your taxes with a credit card:

When fees outweigh rewards: Rewards must be worth more than the fee to pay with a credit card. For example, if you charged $1,000 to your rewards credit card that pays 1 percent cash back, but also paid a processing fee of 1.99 percent, you’d end up losing about $10.

Higher credit utilization: One of the major factors that affects your credit score is your credit utilization ratio. This is how much of your total available credit you’re actually using. For example, if you had $5,000 in available credit and carried a balance of $2,000, your credit utilization would be 40 percent. If your utilization rate is too high, your credit score can take a hit. Experts recommend keeping it below 30 percent. By charging a large tax bill to your card, you could put yourself in danger of exceeding that amount.

Interest charges: If you’re unable to pay off your credit card balance right away, you’ll pay interest on your tax bill and it will continue to accrue.

An installment plan with the IRS is likely to be less expensive. In fact, if you can pay off your tax bill within 120 days, setting up an installment plan won’t cost you anything. Plus, as long as you make your payments on time, an IRS payment plan doesn’t have any impact on your credit score.

How to Pay Taxes With a Credit Card

If you decide that paying your taxes with a credit card is the right move for you, the process is fairly simple. According to McDermott, you file your taxes as normal. Then you visit the IRS page of authorized payment processors and select from the three options.

“If you have used tax preparation software to file your taxes, just let them you know you will be paying directly,” says McDermott. “You will follow payment instructions providing usually your name, Social Security number, the amount you are paying and credit card information.”

McDermott notes you can only use one credit card per payment, but most processors allow you to make two transactions per tax period. You could split the bill between two cards. “If you do this, ensure the amounts are not identical in case either need to be tracked,” says McDermott.

Bottom Line

Sometimes, paying your taxes with a credit card might be necessary. But is there ever a time when it’s actually the best option?

[Read: Best Rewards Credit Cards of 2018.]

Rosen says if you have the cash available to pay your tax bill, it generally doesn’t make sense to use a credit card because of the potential for interest. But even if you’re able to pay off the credit card balance immediately and not incur finance charges, it may not be worth incurring the service fees to charge the tax bill.

“The only time it may be worth it is if the credit card has a generous rewards program which provides a greater value to the taxpayer than the service fee incurred for using the credit card,” says Rosen.

Let’s say you have a $1,000 tax bill you can’t pay right away and need six months to pay it off. At 15 percent APR, you’ll pay $44 in interest over six months, and a $20 processing fee to make the transaction for a total of $64 in interest and fees. If you earn $10 cash back (at a rate of 1 percent cash back), you’ll effectively pay $54 to finance your $1,000 tax bill over six months.

Compare that to a payment plan with the IRS for as little as $43 for a setup fee if you apply online and qualify for the low income rate (since you’d take longer than 120 days to pay it back). If you don’t qualify for the low income option, it will cost you a $149 setup fee to apply online. It really depends on your financial situation. With a higher rewards rate or a sign-up bonus, paying with a credit card might put you ahead.

In any case, Rosen says if you don’t have the cash on hand to pay your bill, paying the service fee and potentially accruing some interest on a credit card balance is still a better alternative to being assessed penalties and late fees by the IRS for not paying at all, “which can be pretty onerous and accrue quickly.”

If you’re faced with the choice between paying by credit card and not paying at all, it may be a good idea to charge it.

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Should You Ever Pay Your Taxes With a Credit Card? originally appeared on usnews.com