How (and why) to pay your taxes with a credit card in 2020
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It’s that time of year again. This tax season, you might be wondering if you can earn miles, points or cash back for paying taxes with one of the best travel credit cards. If you owe money, it’s a good time to consider a strategy for earning the most rewards for spending you’ll have to make anyway. Paying taxes is a great way to meet credit card minimum spending requirements or hit a spending threshold to earn elite status or other perks.
It’s not free to pay taxes with a credit card. At a minimum, you’ll pay a convenience charge of 1.87% through one of the IRS’s approved payment processors. But this can be worth it if it means unlocking a big welcome bonus or racking up points worth more than the fees you’ll pay.
Paying taxes with a credit card doesn’t always make sense. I’ll show you how to do it and whether or not it’s a good idea for you.
Can you pay taxes with a credit card
The IRS lets you pay taxes with a credit card, but you can’t pay them directly. Instead, you’ll have to go through a 3rd-party payment processor. The cheapest credit card processor is Pay 1040, which works for personal and business taxes. They charge a 1.87% fee and allow payments with Visa, Mastercard, American Express and Discover.
Don’t worry, you will not be charged cash advance fees when you pay with a rewards credit card. It’s even in the payment processor FAQs:
Will I be charged a cash advance fee?
No, your tax payment will be treated like a retail purchase and not a cash advance.
I’ve paid taxes using Pay1040 several times and have never been charged a cash advance fee. Each time, the process was easy and painless.
When should you pay taxes with a credit card for points?
If you can’t pay your balance in full and on time, paying taxes with a credit card usually does not make sense. You’ll pay interest that will negate any rewards you earn, on top of the payment processing fee.
However, it’s a good strategy in some situations. For example, if you:
- Want a fast and convenient way to meet minimum spending requirements for a new card welcome bonus
- Need to meet a spending threshold to earn elite status, elite qualifying miles or other big spender perks like free hotel nights
- Can earn more cash back than the fees you’ll pay with certain cash back cards (or miles and points worth more than the fee)
But if you have certain cards or card combinations, you can actually earn travel rewards from your tax payments that can be worth double what you pay in fees.
Best credit cards for paying taxes
The best card for paying your taxes is usually any card you’re trying to meet the minimum spending requirement with. The extra fees you pay often pale in comparison to earning a bonus worth hundreds. But once you’ve meet your spending requirement, you’ll want to crunch the numbers before you pay your taxes with a card.
As rule of thumb, you’ll want to earn at least 2% back in rewards for it to make sense to pay the extra fees. That can easily be done with certain credit cards that earn cash back. The Citi® Double Cash Card earns 2% cash back (1% when you buy and 1% as you pay) on every purchase and the Capital One® Spark® Cash for Business is a great business credit card because it too earns 2% back everywhere.
But, with cash-back cards you’re earning a very modest .13% in profit. In order to really knock it out of the park you need to earn transferable rewards. When you have the ability to move points to airlines and hotels you can turn your tax payments into business-class flights or luxury hotel stays. Below I’ve highlighted the best options for each of the major flexible points programs.
Amex Membership Rewards
Earning Amex Membership Rewards points when you pay taxes is easy with The Blue Business® Plus Credit Card from American Express because it earns 2x Amex points on the first $50,000 in purchases you make each year, then 1x. We value Amex points at two cents each, so you’ll be getting 4% back in rewards and this card has no annual fee. (see rates and fees)
Capital One Rewards
The Capital One® Venture® Rewards Credit Card and Capital One® Spark® Miles for Business both earn a straight forward unlimited 2x miles on every purchase. You can redeem Capital One miles toward eligible travel purchases at a rate of one cent per point, but you can also transfer Capital One miles to airline and hotel partners.
The transfer ratio for Capital One miles is 2:1.5 or 2:1 depending on the partner, which means that not every transfer partner is a good deal. Read our complete guide to the Capital One transfer partners for more details.
If you have the Citi Double Cash card and another card that earns Citi ThankYou points you can convert the cash back you earn into Citi ThankYou points at a rate of one cent to one point. In order to be able to transfer ThankYou points you need to have either the Citi Premier® Card or Citi Prestige® Card.
The information for the Capital One Spark Miles and Citi Prestige has been collected independently by Million Mile Secrets. The card details on this page have not been reviewed or provided by the card issuer.
Chase Ultimate Rewards
Most Chase credit cards will only earn 1x Chase Ultimate Rewards points when paying your taxes with those cards. However, you can earn 1.5% back if you pay with the Chase Freedom Unlimited® or Ink Business Unlimited Credit Card. This can be a good option only if you have another Chase Ultimate Rewards card that enables transfers, like the Chase Sapphire Preferred® Card, Chase Sapphire Reserve® or Ink Business Preferred Credit Card, then you’ll be able to pool your points onto that card and transfer them to Chase’s travel partners.
The Freedom Unlimited or Ink Business Unlimited are particularly good options if you have the Chase Sapphire Reserve. The reason for this is because with the Sapphire Reserve your points are worth 1.5 cents each when you book through the Ultimate Rewards travel portal. So you’re earning 2.25% back with either version of the Unlimited card.
Don’t write a check to pay your taxes and earn nothing. Instead, consider paying your taxes with a rewards credit card to earn valuable miles, points or cash back. It’s not free – there’s a convenience fee when you pay your taxes through IRS-approved 3rd-party payment processors, like Pay 1040. It can be worth paying a fee if the rewards you earn get you more value, especially if you use the payment to meet the minimum spending and earn a welcome bonus on a new credit card.
With the right card or card combination, you can actually earn a profit paying taxes, for example, The Blue Business® Plus Credit Card from American Express or Citi® Double Cash Card are great no-annual-fee options.
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For the rates and fees of The Blue Business Plus Card from American Express, please click here.
Featured photo by Africa Studio/Shutterstock.
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