Ah, tax season.
As many Americans are starting to
procrastinate finalize their tax returns, questions about earning points for making those payments always come up. That’s particularly relevant this year, and individuals and businesses may be paying two quarters worth of estimated payments along with their 2019 return.
I pay all my estimated quarterly and annual taxes by credit card, so figured it would be helpful to go through the details of that for people who haven’t done it before or might need a refresher. I’ve updated this with new examples since last time we published it, but if you’re already familiar with how to pay taxes with your credit card without paying more in fees than you save, feel free to skip it.
How much does it cost?
If you need to pay State or Local taxes, those rules (and fees) vary tremendously, so you’ll want to check with your local tax authority. For Federal taxes, however, there are three services that can accept credit cards for tax payments, with the following fee structure:
Obviously the best play here is to utilize the service with the lowest fees, but in certain circumstances using one of the others can make sense as well.
Splitting your payments
If you have a very large payment to make that exceeds your limits on your credit card (and if so, congrats on your success last year / I’m sorry), or if you want to spread your spending across multiple cards for other reasons, you can do that.
The IRS page notes that most forms allow you to make two payments via credit card. What isn’t clearly stated, however, is that in practice you can make two payments via credit card with each service, for each period or form.
So theoretically you could make six payments for your 2019 balance due this week, and then another six payments for your Q1 & Q2 2020 estimated tax payments. Typically you’d have been able to do six for each quarter, but given the combined due date this year, I would plan around six total.
Hopefully you don’t need to do that, and keep in mind that the fees for some of the services are higher, but it is an option. The IRS helpfully(?) tracks everything by the primary taxpayer’s social security number, so regardless of which method or service you use, you can easily verify that all payments were received.
Calculate the return
Just because you can put taxes on a credit card doesn’t mean that you should. With fees fluttering around 2%, you shouldn’t pay your taxes this way without calculating your net cost/gain.
These numbers will vary based on how you value miles, but let’s look at a few examples. If you’re using Pay1040.com, for example, which levies a 1.87% fee, here’s what a $5,000 payment (with $93.50 in fees) would look like using Ben’s values on a few different cards:
|Card (click card name for more details)||Return on everyday spend||Value of rewards||Net cost of $5k payment|
|Citi® Double Cash Card||1% cash back when you buy, plus an additional 1% as you pay, but can be combined with other ThankYou points||1.70¢ / $170 with ThankYou
1.00¢ / $100.00 without ThankYou
|($76.50) with Thank You
($6.50) without ThankYou
|The Blue Business® Plus Credit Card from American Express||2x points (up to the first $50,000 spent per calendar year)||1.70¢ / $170.00||($76.50)|
|Bank of America® Premium Rewards® credit card + Preferred Rewards Program||2.625% with the Preferred Rewards Platinum Honors program,||1.00¢ / $131.25 with Preferred Rewards Platinum||($37.75) with Preferred Rewards Platinum|
|The Business Platinum Card® from American Express||1.5x points (on purchases of $5,000 or more)||1.70¢ / $127.50||($34.00)|
|Chase Freedom Unlimited® or Chase Ink Unlimited||1.5x points||1.70¢ / $127.50||($34.00)|
|Capital One Venture Rewards Credit Card or Capital One® Spark® Miles for Business||2x miles||1.10¢ / $110||($16.50)|
|Brex for Startups||1x points||1.7¢ / $85||$8.50|
|World of Hyatt Credit Card||1x points||1.5¢ / $75||$18.50|
|Bank of America® Premium Rewards® credit card||1.5% (without any Preferred Rewards Program bonus)||1.00¢ / $75||$18.50|
|Hilton Honors American Express Surpass® Card or Hilton Honors American Express Aspire Card||3x points||0.40¢ / $60||$33.50|
Obviously there are many other cards you could consider using here, but hopefully, that helps you get the idea. In general, you want to use a card that offers more than 1x point per dollar on everyday spend, though if you have other goals (are meeting minimum spend, are reaching for a threshold bonus, or are trying to top off for an award), cards with lower earnings rates can make sense too.
Keep in mind that how you are going to use the points matters as well, though isn’t reflected in the table other than the general weighting Ben gives a points currency.
With The Business Platinum Card® from American Express, you’d not only be getting 1.5 points/$1 for a purchase over $5k, the card also gives you a 35% refund when you redeem points through the “Pay with Points” option. This is essentially an opportunity to redeem Membership Rewards points for 1.35 cents of airfare each (either on your designated airline in economy, or on any available airline in business or first class).
So that $5,000 tax payment earns 7,500 Membership Rewards points, which can be used for $115.38 towards airfare through the Pay With Points option. Subtract out the $93.50 in fees, and you’re still coming out ahead even if you don’t accumulate additional points to transfer for a big award (provided you were going to spend money on airfare this year, but I assume that’s why you’re all here).
As you can see, using the right card is critical in order for this to be worthwhile. Though there are a few exceptions where you might accept a lesser return in exchange for another benefit.
Meeting minimum spend
In most cases, even if you apply for a card today and are approved promptly, you unfortunately might not receive it in time to make a payment this week. If you will need to pay estimated quarterly taxes in September, and are planning ahead, you obviously have plenty of time.
Otherwise, American Express often issues temporary cards that can be used for online purchases until your physical card arrives, provided you sign up online and are instantly approved. If you’ve been considering an Amex card, it may make sense to apply for one of those, get the temporary card, and knock out the minimum spend quickly.
And of course, if you’re working towards a large welcome bonus, the return for each $ spent towards the minimum spend is significantly higher, which helps the math as well.
Achieving threshold bonuses
Sometimes it’s not the points themselves that are most valuable, but the extra perks you get for spending a certain amount on a credit card.
For example, the Hilton Honors American Express Surpass® Card and The Hilton Honors American Express Business Card offer a Weekend Night Reward from Hilton Honors after you spend $15,000 in purchases on your card in a calendar year. A $15,000 tax payment would have a net cost of ~$100.50 once you subtract out the value of the Hilton points earned. If you have a particular trip in mind, that could still be an excellent value.
In general, if meeting those spending thresholds wouldn’t otherwise be possible, it’s worth considering if the 1.87-1.99% fee for paying taxes via a card could still be a good value.
Promotional or low-interest opportunities
In general, I wouldn’t recommend putting any large purchase on a credit card unless you also have the cash to pay it off. An unexpectedly large and unaffordable tax bill, for example, is likely best resolved by setting up a payment plan with the IRS.
If you just need a bit of wiggle room, however, it could be worth examining the many cards offering a promotional interest rate on purchases as part of the welcome bonus. The number of months at the promotional rate vary by card, so check the terms, but if you can plan and budget such that the full balance could then be paid in a few months, putting your taxes on an extremely low or even 0% card (that also earns points) could be a good option.
Earning a chunk of points can take some of the sting out of making tax payments, but be sure the return or benefits make sense for your situation before paying that extra fee.
Who else pays taxes with a credit card? Which card are you using this time around?