Pay your taxes with a credit card for FREE!

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In yesterday's post about American Express's highest signup bonus ever for the Starwood Preferred Guest credit I mentioned some upcoming posts about how to meet credit card minimum spending requirements.  Paying taxes is one such way.  In this post, I'll show you and easy way to pay your taxes that has a 1.87%-2.0% fee and a slightly more complicated way which is free (or can even make you a small profit).

Background

The IRS's website provides a list of payment processors for tax payments.  Currently there are 3 different payment processors listed.  You can see the fees involved for each by using a credit or debit card.

 

A few notes:

  • You are allowed to make two payments to each of the payment processors (2 payments per processor X 3 processors) for a total of six payments.
  • These payments are NOT a cash advance on your credit card.  If you read the FAQ at any of the processor's websites, you will see that payments are treated as a purchase and NOT a cash advance.
  • Plastiq.com also allows you to make an unlimited amount of payments directly to the IRS - but they have a slightly higher fee than the above mentioned payment processors.  The fee varies by the type of card you use.  If you have a small tax payment due and have never had a Plastiq account, if you sign up using this special link - there is no fee for the first $200 in credit card payments to the IRS or any other bill you may have (mortgage, rent, utility, etc).

The Easy Way

The easy way simply involves going to one of the above listed websites and paying your taxes with any credit card of your choice.  This can come in handy if you need to meet a minimum spending requirement for a bonus on a new credit card.  You can also make a small profit if you have a 2% cashback credit card (Fidelity Rewards Visa or Citi Double Cash Card).

Example of $2750 Tax Payment:

  • $2750 tax payment + 1.87% fee = $2801.42
  • Cash back earned at 2% = $56.03
  • A small profit of ($56.03- $51.42) = $4.61

 

 

 

 

 

[May 2017 Update - CVS has stopped selling PayPal My Cash Cards]

The slightly complicated but FREE Way

The free involves a few steps and a few hoops to jump through.  I'll walk you through the steps below.

  1. Signup for a Paypal account if you already don't have one.
  2. Signup to receive a Paypal Debit card.  This debit uses the funds in your Paypal account for purchases and also provides you with a 1% cash back on purchases.  Sign up here: https://www.paypal.com/us/webapps/mpp/debit-card
  3. Purchase Paypal My Cash cards with your preferred credit card.  See below for what they look like - they are usually hanging in the gift card rack with all of the other retailer gift cards. Here is the list of retailers that sell them.  I'm sure some retailers will not allow you to purchase with a credit card, but I personally buy them from CVS with a credit card with no problems.  I have purchased $2000 in a single transaction - they will scan the barcode on your driver's license.
  4. Next, you will need to load the Paypal My Cash cards to your Paypal account at https://www.paypal-cash.com/.  Don't try to load it immediately after you buy it, it takes a little while for the activation to occur - usually a few hours. There is a 10 digit scratch off code on the back of the card card that you enter on the website and login in to your paypal account.  You are allowed to load $500/day and up to $4000/month using this method.
  5. After you have loaded the amount of your tax payment to your Paypal account, head over to one the IRS payment processors.  I have been using PayUSAtax.com.  Make a DEBIT card payment using your Paypal Debit card that you obtained in step 1.  The fee will be $2.65 for using the debit card.

Example of $2750 Tax Payment:

  • Buy six $500 Paypal My Cash cards with a credit card = $3.95 fee x 6 = $23.70 total fee for Paypal My Cash cards
  • PayUSAtax debit card fee = $2.69
  • Earn 1% rebate from using Paypal debit card = ($2750 + $2.69 = $2752.69 @ 1%) = $27.53
  • Profit = ($27.53 cash rebate -$2.65 debit card fee -$23.70 Paypal My Cash card fees) $1.18 + whatever you earned on the credit card when you purchased the Paypal My Cash cards
    • if you used a 2% cash back card - you would have earned an extra $60.47 ($3023.70 x 2%)
    • or you could have earned over 3000 miles or points with your favorite hotel, airline, or credit card
    • or this could have helped you easily meet the spending requirement for the SPG signup bonus or a different credit card.

A few notes:

  • The limit of the Paypal debit card is $3000 per transaction - so the most you can pay at one time is $2997.35 tax payment + $2.65 fee.
  • I personally haven't had the need to use all 3 payment processors - as you can see by my example PayUSAtax works as I described.
  • A reader wrote me to say that Pay1040.com did not recognize the Paypal debit card as a 'debit' card.
  • The reader also tried OfficialPayments.com/fed using the above method and while OfficialPayments.com allowed and recognized the Paypal debit card a debit card, he indicated it was processed as a PIN debit card transaction (only debit signature transactions get the 1% cash back).

What if I got a refund and don't have to pay taxes?

  • First stop giving the US Government an interest free loan - adjust your W2 so less tax is taken out of your paycheck - here is a great calculator that will help you make the necessary adjustments.
  • You can also use this method for paying quarterly estimated taxes.  Late last year, I adjusted my allowances to 20 on my W2 so a very minimum amount of federal taxes is deducted from my paycheck.  I then figured estimated my taxes for next year using this calculator and setup an automatic transfer from my checking account to a 'tax savings' account.  Once the tax savings account builds up to $2500, I'll go out and purchase Paypal MyCash gift cards with a credit card and make a tax payment as described above.  I simply then do a transfer back of $2500 from the tax savings account to my checking account in order to pay the credit card bill when it comes due.  Please let me know if you have any questions on this, it's a little complicated.

 


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21 thoughts on “Pay your taxes with a credit card for FREE!

  1. When loading the card into paypal account, does it ask for any personal info for verification ?
    have you had any issues around this? I’ve heard sporadic issues on this topic, so checking.

    • no, you just have to login to your paypal account (so they already have your personal info) and hit a button ‘load it up’. then you get an email confirmation.

  2. On the PayPal website, it states “You’ll receive 1% unlimited cash back when your purchase is completed as a credit transaction by phone, online or in stores. Payments using a PIN or transactions that the merchant processes as PIN-less debit are not eligible for cash back. ” If you choose debit card, wouldn’t this mean you wouldn’t get the 1% cash back?

  3. I tried with a 500 card today and was able to load into the paypal account. Will add few more before paying taxes.

    Question – the cash card says that its reusable and can be reloaded. Is it worth re-loading the same card, or its simple enough to buy a new one every time?

  4. Great article. When you adjusted W2 allowances to lower federal taxes deducted from paycheck, is it mandatory to fill up Form 1040-ES in order to make quarterly estimated tax payments, or one can just go ahead and use payment processors to make the payments? Thanks.

    • No, I just made quarterly estimated using the payment processors. They email you a receipt, I also took a screenshot of the payment confirmation page. Keep these along with a spreadsheet of how much you paid. At tax time, you just enter the amount and date of payments on the payments made section (I used TurboTax).

    • no need to file the 1040-ES form – just make the payment with the processor. They tie it to your SS#. Keep a copy of the emailed receipt and I take a screenshot of the payment confirmation page also.

  5. Tried pay1940.com today. It doesn’t recognize the PayPal mastercard as debit card and wants to charge me the credit card fee. Switched to payusatax.com and it worked just as you said. Thank you!

  6. After paying, I got two emails from​ PayPal. One informing me that my MC was deactivated due to suspicious activity. The other informing me that my PayPal account was unaccessible and asking​ me to login my account and perform additional tasks. I was prompt to confirm my identity and change my password. Now my account and MC are active again. This tells me PayPal doesn’t like what I did. Not sure if I can do it again.

    • Might have been because it was a large transaction – like credit cards sometimes due with fraud protection. I’ve never had an issue.

  7. Seems like CVS has stopped selling Paypal cash cards, apparently due to some fraud related issues!! Bummer. Is there any other store that sells these using credit cards?
    I checked Walgreens and Rite aid, and both say cash only.

    So this method is gone!!!

    • Thanks – I updated the post with CVS ending sales of Paypal My Cash cards. I’m not familiar with any other locations selling them. It was fun while it lasted.

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