At first glance, using credit cards to pay taxes does not appear to be wise. The IRS does not simply accept credit cards the way most merchants do, it requires taxpayers to use an intermediary service. Each of the companies that accept credit cards on the IRS’s behalf charge a “convenience fee” that ranges from 1.89% – 3.93%. At these rates, no credit card will offer a higher rate of cash back than the convenience fee charged. Nevertheless, credit cards rewards can be used to reduce the additional cost of using them to paying taxes.
Using Cash Back To Partially Offset Fees
The lowest convenience fee charged for accepting tax payments is the 1.89% fee charged by WorldPay. Unfortunately, this rate only applies to payments made with a MasterCard or a Discover card. At this time, there simply are no cards from either network that offer cash back rates that high. Nevertheless, several of these cards offer 1% cash back or even higher. For example, the Capital One Cash Rewards MasterCard offers 1% cash back along with a 50% bonus at the end of the year, for a combined total of 1.5%. Therefore, the taxpayer needs to only absorb the remaining .39%.
In other cases, cards such as the Capital One Venture Rewards card can offer double miles which easily equates to 2% cash back as a statement credit towards any travel related expense. As a Visa card, the lowest fee available for tax payments is the 2.29% fee offered from World Pay’s ValueTaxPayment.com web site. In this case, the cardholder is now only paying an additional .29% or $2.90 in fees for every $1,000 paid.
Using Tax Payments To Reach Sign Up Bonuses and Annual Spending Thresholds
Even though there will always be some out of pocket loss when paying taxes with a credit card, there are some situations where the additional spending can help cardholders realize rewards that are worth more than the fees paid. For example, most credit cards that offer a sign up bonus require that new cardholders make a minimum amount of purchases within a certain time period. Others offer additional bonus points, miles, or other perks each year when a spending threshold is reached. By paying taxes with a credit card in order to qualify for these bonuses, cardholders will often find that the convenience fees are more than offset by the rewards being offered.