When you're self-employed like I am, paying federal taxes can be a little more complicated than it is for other people. While many people either get a tax refund or pay their tax bill once a year when they file their returns, I have to submit quarterly estimated taxes and pay the IRS four times per year.
Naturally, I’m after the best and the easiest way to submit these tax payments since I'm making so many of them. And I also want to earn credit card rewards for any large payments I make. But how do you accomplish those things when it comes to tax payments?
In recent years, I've been able to achieve all of this by switching to paying my taxes with a credit card.
The problem with how I used to pay my taxes
Up until a few years ago, I paid my taxes by sending checks to the IRS. My accountant helped me figure out the amount I needed to submit and gave me pre-printed forms I used to mail my payment. Thankfully, I live in Florida, so I don't have any state or local taxes to send in on tax day, so my quarterly federal tax was the only payment to make.
This still became a big hassle, though. I was tired of sending checks and waiting for them to clear. Because of the way the estimated tax system is set up, I was also sending two payments really close together: one in April and the next in June. This sometimes made it hard to come up with the cashflow for both payments.
And, of course, as someone who is an expert in rewards credit cards, it bothered me that I wasn't earning points, miles, or cash back for the large payments I was making four times a year.
What I discovered that changed how I pay
Since I was tired of this approach, I decided to look into alternatives. On the IRS website, I discovered:
- I could pay my taxes for free by having the money withdrawn directly from my bank account
- I could pay a fee to use a third-party payment processor so I could pay via my debit card or my credit card
The fee for using a debit card was pretty small — just a few dollars — but the fee for using a credit card would equal just under 2% of the amount I submitted for payment.
As I considered these options, I reasoned that having the money automatically withdrawn from my bank account would eliminate the annoyance associated with writing and mailing in a check. But it wouldn't do anything to solve the problem of payments being too close together. Nor would it net me any rewards.
And paying with a debit card seemed like an even worse idea because I'd be paying a fee but still not eliminating the things I disliked about the way my taxes were paid. And I still wouldn't get rewards.
Ultimately, that meant the best and only approach that was right for me was to pay my tax bill with a credit card.
Why I pay my taxes with a credit card
Paying my taxes with a credit card provides me with many advantages:
It takes just a second to input my information with an approved third-party payment processor to submit my payment. And I can see the pending payment right away so I know the money has been paid out, unlike waiting for a check to clear.
It provides more flexibility in timing payments
When I pay my taxes, I can time the payment so it posts to my credit card right at the start of a new billing cycle. This gives me extra time to save up the money to pay my taxes because I don't have to pay the bill until my next statement comes. An extra 30 days can make a big difference.
If I needed even more time, I could apply for a credit card with an introductory 0% APR on purchases. This would give me months to repay the balance without incurring any interest charges or IRS late fees.
I can earn rewards
I use the Bank of America Premium Rewards Credit Card to pay my taxes because I qualify for the Platinum Honors preferred rewards tier. This means I get 2.625% back for everyday purchases (1.5X standard cash back plus a 75% rewards bonus).
While I do pay a 1.87% fee to use Pay1040.com to process my tax payment, I still end up getting .755% cash back (2.625 - 1.87 = .755). While this isn't a ton of rewards, it's far better than none — and it’s far better than paying a fee or interest. Plus, these cashback rewards can add up to several hundred dollars when paying a large tax bill.
It helps me earn a spending bonus
When I first signed up for my credit card, I was able to qualify for a new cardmember bonus. The current bonus for the Bank of America Premium Rewards Credit Card is 50,000 bonus points after spending $3,000 in the first 90 days. I signed up for the card shortly before making a tax payment so I immediately hit the spending requirement and earned my bonus.
If I ever sign up for another card and want to get the associated welcome bonus, I'll likely repeat this process and timing. I’ll apply for the card in time for one of my tax bills, and use my tax payment to hit the required spending threshold.
How to decide if paying your taxes with a credit card makes sense
If you're considering paying your taxes with a credit card, you need to think about the fact that you will have to pay a fee for the payment to be processed. Pay1040.com has the least expensive fee at 1.87% (as of Dec. 13, 2019), but there are several other payment services that are available as well. This fee can be expensive and isn't worth paying unless there's other factors to offset it.
If you have a credit card providing at least 2% cash back, such as the Citi Double Cash Card, you can cover the fee and get a small amount of rewards. If you can do this, then paying your taxes with a credit card can make sense — especially since paying with your card is so convenient.
If you're trying to qualify for a bonus for opening a new card — such the Capital One® Venture® Rewards Credit Card, with which you can earn earn 50,000 bonus miles after spending $3,000 in the first 3 months — and want a little extra time to pay your taxes interest free, then using a card is also a smart move.
But if you don't need the extra few weeks to come up with the money for your tax bill and/or you'll end up paying a fee without getting enough rewards to offset it, paying your taxes with a credit card probably isn't the best choice for you.
Not paying off your credit card in full after you’ve used it for your taxes typically doesn’t make sense either, since you’ll end up nullifying any fee savings or rewards by paying interest.
If you're going to owe money to the IRS, you should carefully consider the best way to make your payment.
- Paying with a check is slow and can make managing your personal cashflow difficult.
- Direct withdrawal from your bank account is convenient and free, but it provides no other benefits.
- Paying with your debit card results in a small fee and few benefits.
- Paying with your credit card could be advantageous if you either need a little extra time to gather the funds or can earn enough rewards to cover the credit card processing fee.
By considering what makes sense for your situation, you can choose the payment approach that works best to meet your needs.