Your tax bill has come and gone, with you still owing money because you’re a little strapped for cash. Or maybe you’re considering alternative payment options for your upcoming quarterly estimated tax payment. There’s also noise out of Washington, D.C., that checks will no longer be accepted. Regardless, the IRS continues to make credit card payments an option for you to pay your taxes. Here’s what you need to know about using credit cards when considering this option to pay your tax bill.

What you need to know

The IRS has contracted with several credit card merchants to offer credit cards as a payment method. Why not? Most of us are used to paying for merchandise, from groceries to sweaters, with our credit cards. Ah, but there’s a catch. Stores (also known as merchants) pay a fee that is split among their bank, the transaction processor, and the credit card company for each transaction. This is an interchange fee, which the IRS will not pay. You must pay it.

Using a credit card

The fee paid by you for paying your tax bill with a credit card is referred to as a convenience fee by the IRS and the credit card processors. The fee is based on a percentage of the amount charged, from 1.75% to 1.85%, with a minimum fee of $2.50 or more. For example, using Pay 1040 Corporation’s credit card transaction fee of 1.75% with a $2.50 minimum fee, and a tax bill of:

• $150.00 would cost you $2.63
• $1,000.00 would cost you $17.50

However, please note that if you don’t pay your credit card balance in full, you must also include the interest cost of the loan provided by the credit card company. This incremental interest could be as high as 25%!

The good news. You can use any of the four major credit cards to pay your taxes: Visa, Mastercard, American Express, or Discover. In addition, you can earn miles and points if you use a rewards credit card.

The bad news. This payment method adds an expense to your tax bill. Plus, there is a limit to the number of payments you can make using this method, which is two per year.

How to pay a tax bill

Remember, if you are considering paying your taxes with a credit card and carrying a balance from month to month, you are essentially taking out a loan to pay your taxes. Using this perspective:

Get a better loan somewhere else. Perhaps a short-term loan from a bank or credit union would be a more sensible option. Consider borrowing the money from a family member. Creating the proper loan documentation might be a good way for that family member to earn a nice interest rate.

Consider borrowing from Uncle Sam. Installment payment plans are available for qualified taxpayers. Although a setup fee is applicable, the monthly interest charged by the government is typically lower than that charged by credit card companies.

Use planning to your advantage. Create a plan to pay for next year’s tax obligation throughout the year. That will avoid a repeat of needing funds to pay your tax bill. This may cause some hardship, but saving a little bit more each week through payroll withholdings is usually more manageable for most of us than a big tax bite in April.

While paying your tax bill with a credit card is often one of the most expensive ways to pay your taxes, it’s vastly less expensive than paying high penalties and interest on unpaid taxes. Contact our RRBB advisors if you have any questions.