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Preparing taxes is no fun. No fun at all. But paying taxes doesn’t have to be painful. In fact, paying federal taxes can be quite rewarding. The key is to earn credit card rewards that more than offset tax payment fees. Here’s what you need to know…
Background
Here is some key information you’ll need to know about paying taxes with credit or debit cards:
Credit card fee 1.87% to 1.99%: The IRS maintains a list of companies that accept credit and debit cards towards tax payments. You can find the current information by clicking here. Currently there are three separate payment processing companies on the list. At the time of this writing, debit card fees range from $2 to $2.59 per transaction and credit card fees range from 1.87% to 1.99%. Alternatively, you can pay taxes via the Plastiq Bill Pay service, but that will cost you more: 2.5%.
Two payment limit (per processor): The IRS maintains a table of frequency limits for paying taxes via credit or debit card (found here). In general, they say you can make up to two payments per tax period per type of tax payment. For example, you can make 2 payments every quarter to your quarterly estimated taxes, and you can make 2 payments every year to your annual taxes. Important: In my experience, these limits are enforced per payment processing company. That means that you can really make up to 6 payments per tax period per type of tax payment. An IRS advisor I spoke with several years ago did not think that there would be any problem with making more than 2 payments by using different processors. Since then, I have made more than 2 payments per tax period many times and never had any issues. That is, of course, just my own personal experience. I can’t guarantee that your outcome would be the same.
No cash advance fees: I’m often asked whether credit card companies charge cash advance fees when paying taxes by credit card. The answer is no. All three payment processors agree (via their FAQ pages) that the payment is treated as a purchase not a cash advance. You can find FAQ info here, here, and here.
Unlimited payments: If you’re willing to incur slightly higher fees, you can make an unlimited number of tax payments via the Plastiq bill pay service. Plastiq usually charges 2.5% to pay bills (including taxes) via credit card, but they occasionally offer lower fees via short term promotions. For details, please see: Plastiq Bill Payment Service.
Fees may be deductible: The IRS says the following:
- The fee is deductible for personal tax types as a miscellaneous itemized deduction. However, only those miscellaneous expenses that exceed 2 percent of the adjusted gross income can be deducted. For more information, refer to Publication 529, Miscellaneous Deductions.
- For business tax types, the fee is a deductible business expense.
View tax payment history: Once you’ve made payments through online processors, you may want to see proof that the IRS received the amount you sent. You can view your past payments at any time by signing up with this government website: www.eftps.gov/eftps/. Full details of how to signup and view your past payments can be found here.
Reporting estimated payments: Estimated payments should be reported when filing your annual taxes on line 65 of Form 1040 or line 41 of Form 1040A. In my experience, if you make a mistake and forget to report some of these payments, the IRS will catch the error and refund the difference.
Top 5 reasons to pay federal taxes with a credit card or gift card
1. Profit
A number of credit cards earn cash rewards greater than 1.87%.The best of the best is the Discover It Miles card which earns 1.5% cash back and doubles all cash back earned during your first year of card membership. So, if you have the card and you’re still in your first year of card membership, you’ll make a profit by paying your taxes with your credit card. Since you’ll earn 3% cash back on both the base tax payment and the processing fees, your profit should be approximately 1.186% of your tax payment.
Example:
- $10,000 tax payment + 1.87% fee = $10,187
- Cash back earned at 3% = $305.61
- Profit = $305.61 – $187 = $118.61 (1.186% of $10K)
2. Meet minimum spend requirements
If you recently signed up for new credit cards, chances are good that you have to spend thousands of dollars in order to earn the associated signup bonuses. Paying taxes is a fairly cheap and easy way to accomplish that.
3. Buy miles cheaply
Several credit cards offer up to 1.5 miles per dollar for spend. In these cases, a 1.87% tax payment fee means that you can essentially buy miles for 1.22 cents per dollar. Even better, the Amex Blue Business Plus credit card earns 2 Membership Rewards points per dollar. In this case you can essentially buy miles for 0.92 cents per dollar.
2X Example:
- $10,000 tax payment + 1.87% fee = $10,187
- Miles earned at 2X = 20,374
- Cost per mile = $187 / 20,374 = 0.92 cents per mile
1.5X Example:
- $10,000 tax payment + 1.87% fee = $10,187
- Miles earned at 1.5X = 15,281
- Cost per mile = $187 / 15,281 = 1.22 cents per mile
Cards that offer 1.5X airline miles per dollar:
- Chase Freedom Unlimited: Earns 1.5 Ultimate Rewards points per dollar for all spend. Pair with a premium card (e.g. Sapphire Reserve, Sapphire Preferred, Ink Business Preferred, etc.) to transfer points to several airline or hotel programs.
- Amex EveryDay Preferred: Every billing period in which you use the card 30 or more times for purchases, you get 50% more points. So, even though you’ll earn just 1X base points in paying taxes, you can earn a 50% bonus just by using the card frequently. Points can be transferred to a large number of airline programs.
- The Business Platinum Card from American Express OPEN: Earn a 50% point bonus for each purchase of $5,000 or more. If you pay $5,000 or more in taxes, you’ll earn 1.5 points per dollar. Points can be transferred to a large number of airline programs. Note: With this card you won’t earn 1.5X on the payment fees (since they’ll be less than $5,000), so the cost per mile will be slightly less.
- Chase MileagePlus Club: Earns 1.5 United miles per dollar for non United airlines spend.
- BOA Virgin Atlantic World Elite: Earns 1.5 Virgin Atlantic miles per dollar for non Virgin Atlantic spend.
Cards that offer 2X airline miles per dollar:
- Amex Blue Business Plus: Earns 2 Membership Rewards points per dollar on up to $50K spend per calendar year.
4. Earn valuable big spend bonuses: elite status, free nights, companion pass, etc.
Many credit cards offer bonuses for meeting high spend thresholds. You can find a comprehensive list here: Best big spend bonuses. Here are a few examples:
- Amex Delta Reserve or Delta Reserve Business: Spend $30,000, get 15,000 bonus miles plus 15,000 Medallion Qualifying Miles (towards elite status). At $60,000 spend, get another 15,000 bonus miles and 15,000 Medallion Qualifying Miles.
- Amex Delta Platinum or Delta Platinum Business: Spend $25,000, get 10,000 bonus miles plus 10,000 Medallion Qualifying Miles (towards elite status). At $50,000 spend, get another 10,000 bonus miles and 10,000 Medallion Qualifying Miles.
- Southwest Plus, Southwest Premier, or Southwest Business: With Southwest, when you earn 110,000 points in a calendar year (including points earned from credit card spend) you get a companion pass good for an unlimited number of flights for the rest of that year and all of the next calendar year.
- Chase Ritz Carlton Rewards Visa: Earn Platinum status with $75,000 in annual spend.
- Barclaycard JetBlue Plus, or JetBlue Business: Spend $50,000 and get Mosaic status which offers free changes and cancellations; free checked bags; expedited security; early boarding; free drinks; enhanced point earnings; and 15,000 bonus points upon qualifying.
5. Liquidate Visa/MasterCard gift cards cheaply
Visa and MasterCard gift cards are debit cards. As such, they qualify for low flat fees for debit tax payments: $2.25, $2.59, or $2.65 (depending upon the tax processor you use). In other words, your cost to liquidate $500 gift cards will be approximately half a percent (0.5% to 0.54%). That’s pretty cheap.
If you use $500 Visa/MasterCard gift cards, then you can pay the following amounts:
- PayUSAtax.com ($2.58 fee): Make a $497.42 payment.
- Pay1040.com ($2.59 fee): Make a $497.41 payment.
- OfficialPayments.com ($2 fee): Make a $498 payment.
The biggest problem with this is the IRS imposed 2 payments per processor limit. Online, this means that you can liquidate no more than 6 gift cards per type of tax payment. Via phone, though, you may find a tax processor willing to accept multiple debit cards for a single overall payment. Specifically, OfficialPayments is known to accept multiple gift cards via phone. When you make multiple payments over the phone, you do pay the $2.25 fee for each gift card. Unfortunately, OfficialPayments no longer works with Visa gift cards. Some Mastercard gift cards work, though (see below)
Which gift cards work?
- Visa gift card issued by Metabank via PayUSAtax online
- Visa gift card issued by Metabank via Pay1040 online
- Mastercard gift cards from Giftcards.com work with all three processors
Which gift cards don’t work?
- Visa gift cards via OfficialPayments do not work
- Some Mastercard gift cards via OfficialPayments process as credit cards rather than debit cards (one known example are the US Bank Mastercards typically bought at grocery stores).
See also: Best options for buying Visa and MasterCard gift cards.
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Do plastiq payments also show up on EFTPS? It seems that somehow my payments did not show up, so I am a little bit worried! (I suppose I can call the IRS as well…)
Yes, they should show up there. How long ago did you make the payment? Maybe it takes several weeks?
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Can you please explain a little bit about who can pay this? I am an employee who has taxes withheld from paycheck through my employer. Can I make extra payments on Dec 29, 2017 (today) and get that money back when I file taxes in February 2018?
Yes you can. There is no rule against overpaying estimated taxes.
Greg – Trying to understand the how to pay tax online and claim it back if I overpaid it. So if I pay tax for 2017 – 1040 now, I can get the difference back when I file the tax or only next year I can get the overpaid tax back?
You will get the difference back when you file your 2017 taxes now
Official Payments still declining $500 VGC from Metabank, tried on 12/9. Same reason as before when I checked with VGC, they tried to charge as a subscription/recurring payment. The other 2 processors accepted them fine as debit. Hate to see 6 payments reduced to 4 payments each quarter, sigh…
Have you tried Mastercards?
Hi Greg, no I have not.
I have a question about taking a business tax deduction on VGC fees. I buy VGCs and pay my state business taxes online with them. In addition to the processing fee which I believe is a legitimate business expense, do you think I can deduct the $5.95 or $6.95 fee I pay to purchase the VGC? I’ll consult a tax professional but would be interested to know what people have done and what they think is allowable. Thanks.
Wow, I don’t know about that. It might be technically OK, but personally I wouldn’t try to expense the gift card purchasing fees — it would be way to hard to explain if I was ever audited.
I am quite new to this, and I have a follow up question! If I do make these payments (and even make overpayments), do I write it anywhere on the 1040 form (in the payments made section)? Or does IRS have it on record, so I’ll have the amount that comes out as I should pay to the federal at the end of tax forms, but don’t have to care about it if I made more payments than required, since IRS has a record of it? Similarly, if I have made overpayments, IRS would send me a check at the end of the day, without it being indicated on the 1040…?? Thank you in advance for your help!
[8/23/17 Updated Reply]
When you pay taxes via these services, they will ask you which taxes you are paying (ex: 1040 estimated tax, 1040 2017, etc.) and it will collect your SSN and other info that the IRS will use to match up your return with the payments.
You should then report these payments on line 65 of Form 1040 or line 41 of Form 1040A. In my experience, if you make a mistake (forget to report some of these payments), the IRS will catch the error and refund the difference.
Greg, could you answer this with a little more detail? I see that pay1040 etc takes your info and applies the payment to your account/SSN. But what do you indicate in 2018 when you’re filing your return, say via turbo tax?
Shouldn’t these payments be shown on line 65 — Estimated Taxes Paid? If not, how will you know if you have an overpayment or underpayment. And if an underpayment, how much tax to pay with your return?
Thanks Terry! Yes, indeed. My previous comment was incorrect. I’ve updated it with better info.
Greg,
Thank you for your reply! I have mis-read line 65 to assume it was amounts applied from previous years only. This all makes sense!
Thank you again
Do estimated payments made through plastiq show up on eftps like the other payment processors?
I’d be very surprised if they didn’t, but I haven’t tried making these payments through Plastiq so I can’t say for sure.
Thanks for the DP, BL.
I am hoping Official Payments will really take a serious look into this and fix it.
Still not working as of 6/26
Another DP: Using Metabank VGC for Estimated Tax payments this morning was declined. Same explanation given by rep at VGC — that they use this recurring payment type and that was the reason for denial. The supervisor at OfficialPayments said they cannot override the payment type. Hope they would fix the system soon. 🙁
Sub
Thanks for the DP, boridi.
OneVanilla Prepaid VGC (Bancorp) via Official Payments -> Failure (Again!)
VGC (Metabank) via Official Payments -> Failure (Again!)
The CSR for the Metabank VGC said something to the effect that the merchant (OP) is not supported by Visa, so for security reasons it did not process.
After all these failures to process the different Visa gift cards and getting different explanations from Official Payments, Metabank, and Bancorp; it seems as if Official Payments made a change in their system that somehow signals the gift card issuer to deny the transactions. For now I will buy money orders with the Visa gift cards until if/when this issue is fixed.
Thanks for your DP, Charles. If Visa doesn’t work at OP, I wonder if Mastercard gift cards would work. I have been buying the Visa Vanilla at CVS (2nd qtr 5% Citi cards at drugstores) because they used to work at OP. I would buy MC instead if I thought that they would work. If MC do work, earlier DP state that some post as debit and some as credit. Any DP on which ones post as debit?
Last year I tried using a OneVanilla MC as debit but OP will only run it as a credit. They did not give me an explanation as to why they would run a legitimate debit card as a credit through their system. I have read elsewhere that OP has been known to run MCs as credit. I am not sure if there are any MCs that run as debit. Since it is more difficult to get money orders using the MCs, I have avoided them.
It appears that something changed at OP sometime between April 13th and May 12th from accepting Prepaid Visas to declining Prepaid Visas. I remember talking with a CSR at OP on May 19th and they told me that approximately a week or so prior that they could no longer override the two payments per quarter rule. The timing of following the two payments per quarter rule seems to coincide with the error messages of trying to use Prepaid Visas.
My email to Official Payments :
“As of May 2017, there appears to be a glitch in the processing of all Visa Prepaid debit cards issued by Metabank and Bancorp Bank. These cards are being declined by the gift card issuers for payments to Official Payments. Both gift card issuers are receiving a message such as “bill payment recurring” from Official Payments that forces them to decline the transactions. Others are reporting the same problem. The Visa Prepaid debit cards issued by Metabank and Bancorp Bank process successfully at pay1040, PayUSAtax, and for buying money orders.
Please forward this information to the IT department so that they can investigate this issue and correct the problem.” Their response :
“Thank you for contacting Official Payments. We appreciate this valuable information and will be sure to forward this to all parties involved in this research.”
Just bought a OneVanilla. Error when trying to use it at OfficialPayments, but it went through on Pay1040.
I emailed Official Payments regarding the OneVanilla Prepaid Visa card failures and received the following response :
“Thank you for contacting Official Payments. We are happy to assist with your inquiry. We have looked up your payment attempts using your email address and found your payment attempts on 05/25/2017. All of these payment attempts were declined from the card issuer. Official Payments does not have any ability to set up your card to reflect as “recurring payments”. If this response is showing up with your financial institution, then this is populated from them as a generic message. Unfortunately there is no way for us to adjust this.”
I called the OneVanilla Prepaid Visa CSR and they said that the card is being declined because the gift card is being run as a reoccurring or recurring payment. It needs to be run on a different method. It needs to be run as a one-time payment.
Some history : Back in April I had two OneVanilla Prepaid Visa cards processed successfully by Official Payments. Pay1040 & payUSAtax processed the cards successfully this week.
So they are blaming each other and neither one can help.
Any insight?
I may have to resort to using the cards for everyday spend or liquidate through USPS.
That is not good news. Does Pay1040 or PayUSATax allow for payments over the phone as OP used to for payments in excess of two per quarter? If so, that would be another option for liquidating.
I believe all three processors are strictly following the two per quarter rule.
Successfully bought two $500 money orders from USPS with the two OneVanilla VGCs that failed to process at Official Payments.
Terry,
Thanks for sharing those data points. I am also interested if anyone else is having trouble with gift cards and Official Payments.