With the April 15 deadline drawing nearer, 30 million people are expected to owe money to the IRS this year. The time to start thinking about how you will make that payment is now.
In the old days, when the only way to file your taxes was by mailing in completed paper documents, people would be limited to sending in a check to the IRS to pay off amounts owed when filing their returns.
Things have really changed since then, and most people these days file electronically, either on their own or through a third-party tax service such as H&R Block. The way to send and receive money to and from the IRS has also mostly migrated over to the electronic realm, and this migration has offered opportunities to conduct these transactions through various means of electronic payment.
While many Americans receive a refund, which is of course always welcome, this year it is estimated that 30 million people will end up owing money to the IRS, by way of not enough taxes deducted at source to cover their taxable income once deductions are made. They will be faced with several options for remitting the balance owed, and it therefore pays to be in the know about the pros and cons of each.
For those who wish to pay by credit card, they may be glad to know that you can pay your taxes in most cases through one of several payment processors that do accept all major credit cards, including Visa, Mastercard, American Express, and Discover. You can even do this through PayPal by using your card through them as you would with other purchases using this service.
Although the IRS doesn’t charge for your using a credit card, this does involve processing fees, as all these cards charge them. When you make a purchase with your credit card from a merchant, the merchant adds in these costs to the price they charge.
While it may seem that you are getting this service provided to you for free, and therefore can come out ahead if you are using a card that offers rewards for the purchase, this cashes out to those who pay through other means such as a debit card or cash essentially paying a large part of your rewards, with the credit card companies kicking in a little of their own money to entice the people who don’t pay off their bills every month to give back more to them in interest.
You can bet that your tax bill doesn’t include this fee, and therefore when you use your credit card to pay your tax bill, someone has to pay for this, and there’s no one else left but you. The payment processors also have to make a little profit out of this, as they are not just doing this for their country as they would just go out of business otherwise. Although they do get to negotiate fees with credit card companies, there will be a bill left to pay which includes their costs plus a reasonable profit for them.
Costs to Pay Your Taxes with Your Credit Card
Processing fees vary by processor, from 1.87% through World Pay US, 1.96% with LInk2Gov Corp., to 1.99% through Official Payments. All have a minimum fee for their service, ranging from $2.50 to $2.69.
For smaller payments, this can add up to a small enough amount of money that may make the fee pretty meaningless, for instance if you owe $100 you would just pay the minimum fee and enjoy this fast and convenient method of payment. An amount owing of $1000 would bring the fee up to around $20, which may be something people may want to reduce, with higher amounts being even more expensive.
While you may be able to get rewards from your credit card from these purchases, you would need to get 2% back to break even. While you can earn more on certain types of purchases, groceries or gas for instance, you can bet that the IRS isn’t on this list, and this would fall into the all other category which tend to have smaller reward levels.
Rewards earned will reduce your cost, but this is not something that you can expect to profit from like you would buying something with your card. There are people who just try to use their credit cards to buy everything and assume this is to their advantage, but this is a good example of this not always being the case.
A few cards do offer 2% on general purchases, including tax payments, where you would get your money back, and your card may also have an introductory offer which could also have you making sense of using your card to pay your taxes without costing you more. However, you also have to be wary that such a purchase may considered a cash advance, which involves both additional fees and paying interest on the amount borrowed immediately, which can add to the cost of the transaction.
Other Ways to Pay Your Tax Bill
You can always use the old-fashioned way of paying by mailing a check, which does not involve a fee other than possibly from your bank, but the IRS also offers other low or no cost options such as paying through your bank account or with your debit card. Debit card transactions do require a fee, although a more modest one if the transaction is over $100. Debit card fees are flat and are similar to the minimums that are charged for credit cards, and range from $2.00 to $2.58, with Official Payments charging $3.95 flat for payments over $1000.
1040 payments can also be made directly from your bank account free of charge if you have IRS Direct Pay set up, and they take payments of up to $10 million per payment with two payments per day allowed.
Should you not be able to remit the entire amount owing at once, you may be eligible for a payment plan, which you can apply for online, where you agree to make periodic payments of certain amounts according to the terms of the plan you arrange.
If you qualify for this, the costs of this are a $31 set-up fee plus penalties in interest for arrangements lasting 120 days or less, which can be arranged through direct debit, or a set-up fee of $149 plus penalties and interest for plans lasting longer than 120 days. You can’t use direct debit for the longer-term plan, although all other payments methods are available.
The IRS also allows you to revise an existing payment plan, within terms acceptable to them, for an additional $10 fee per revision.
Paying your taxes is not something anyone enjoys, but being more aware of all of your options can make this unpleasant experience at least more convenient.