Don’t pay your taxes with your credit card!

irs-logo225The headline says it all, but if you want to know WHY you shouldn’t pay your taxes with a credit card, the answer is simple: it’s way more expensive.

Yes, we know you’re used to paying the same amount for purchases whether you use cash or a credit card, but it doesn’t work that way when it comes to paying your taxes.

In fact, you’ll pay a fee of anywhere from 1.87% to 1.99% for paying the IRS by credit. If you owe $1000, that’s an extra fee of $18.70 to $19.90. Obviously if you owe more, the fee is more.

Hey, you say, that’s not fair! Why do I have to pay more?

Well, it’s like this. When you use your credit card in a store, the merchant you are buying from has to pay a small “interchange fee” in order to process your credit card. Because you don’t pay this fee, you don’t need to worry about it and you might not have known it even existed.

However, the government, by law, can not pay fees to accept your payment. To get around this, the IRS gives you the option to pay your taxes through a third party. You pay one of the IRS’ partner companies the amount you owe — plus that extra processing fee — and the partner then pays the IRS the amount you owe. The IRS isn’t making any extra money off of you, but you’re still out the fee.

The only time it would ever make sense to pay your taxes with your credit card would be if you were eligible for some short-term reward worth more than 2% of your purchase total. For example, if you had a new credit card that gave you a $500 bonus for spending $3000 in the first three months of having it, or maybe a card that pays 5% cash back for the first 6 months you have the card, you could then actually make a little profit on the deal — provided you completely paid off your credit card when the bill came due. However, we generally advise against playing these types of games unless you always pay off your credit cards and you have a great credit history.