Form 1042-S

Why do you need to file a 1042-S?

Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” needs to be filed to report certain types of income paid to foreign persons (non-U.S. residents). The reasons for filing Form 1042-S include:

Compliance with U.S. Tax Law

• The U.S. requires withholding on certain types of income paid to foreign persons. The Form 1042-S serves to report this income and any tax withheld.

Report Even if No Withholding

• Income may be reportable on Form 1042-S even if no amount is actually withheld due to a tax treaty or other exception. This means that even if the foreign person’s income is not taxed because of a treaty, the income still needs to be reported.

Multiple Types of Income

• Form 1042-S is used to report various types of U.S. sourced income received by foreign persons. This includes, but is not limited to, interest, dividends, rents, royalties, compensation for services performed in the U.S., and certain gambling winnings.

Tax Treaty Benefits

• If a reduced rate or exemption from withholding is claimed under a tax treaty, the income and the treaty benefit are typically reported on Form 1042-S.

Information for Recipients

• Foreign persons receiving U.S. source income need the information from Form 1042-S to accurately report their income and claim credits for any withheld taxes on their U.S. tax returns (if they are required to file one).

Obligation of Withholding Agents

• The withholding agent (or payer) has the responsibility to complete Form 1042-S. Failing to properly report and remit withholding can result in penalties and interest.

Tracking and Reconciliation

• Form 1042-S is crucial for reconciling amounts reported on Form 1042, “Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.” The Form 1042 serves as the transmittal form for all 1042-S forms sent during a year and summarizes the total amounts.

Avoiding Penalties

• There are penalties for failing to file, failing to provide accurate information, and failing to provide the form in a timely manner. By filing correctly and on time, you can avoid these penalties.

Verification of Tax Payments

• The IRS uses the information from Form 1042-S to verify that the correct amount of tax has been paid or withheld on U.S. source income paid to foreign individuals or entities.

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Who needs to file a 1042-S?

Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” is filed by the withholding agent or payer of U.S. source income to report certain types of payments or distributions made to non-U.S. persons. The following entities or individuals typically need to file Form 1042-S:

Withholding Agents

• Any person, U.S. or foreign, who has control, receipt, custody, disposal, or payment of U.S. source income to foreign persons is considered a withholding agent. This can include individuals, corporations, partnerships, trusts, associations, and other entities.

U.S. Businesses and Entities

• U.S. companies that make payments of U.S. sourced income to foreign contractors, vendors, or other non-U.S. business entities.

Financial Institutions

• U.S. banks, brokers, and other financial entities that pay U.S. source income, such as interest or dividends, to foreign account holders.

Payers of Royalties

• Entities that pay royalties from U.S. sources to foreign authors, inventors, and other creators.

Trustees or Executors

• Trustees of a trust or executors of an estate that distribute U.S. source income to foreign beneficiaries.

Partnerships

• Partnerships that distribute U.S. source income to foreign partners.

Universities and Educational Institutions

• Schools and universities that provide scholarships, fellowships, or grants to foreign students.

Gaming Establishments

• Casinos or other gaming organizations that pay gambling winnings to non-resident aliens.

Entities Making Payments on Withholdable Payments to Foreign Financial Institutions

• As part of the Foreign Account Tax Compliance Act (FATCA), entities making certain payments to foreign financial institutions might also need to issue a 1042-S.

Entities Making Distributions from a Qualified Intermediary (QI), Withholding Foreign Partnership (WP), or Withholding Foreign Trust (WT)

• Entities that distribute U.S. sourced income under these specific withholding agreements may also have reporting obligations on Form 1042-S.

It’s important to note that a withholding agent may need to file a Form 1042-S even if no tax was actually withheld from the payment due to an exemption or a reduction under a tax treaty. Moreover, even if a U.S. entity is not the direct payer, if it has control over the payment (e.g., as an intermediary), it might still be considered a withholding agent with an obligation to report.

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Are there any exemptions to filing a 1042-S?

While Form 1042-S is used to report various types of U.S. source income paid to foreign persons, there are specific situations and types of income that may be exempt from reporting on the form or from U.S. withholding tax. Here are some exemptions or exceptions:

Tax Treaty Benefits

• The U.S. has tax treaties with numerous countries that allow residents of those countries to receive certain types of U.S. sourced income at reduced tax rates or exempt from U.S. tax. Even though a tax treaty may reduce or eliminate the tax, the income might still need to be reported on Form 1042-S. However, if the income is fully exempt from tax due to a treaty and there’s no requirement for the recipient to furnish a tax identification number, the payment might not need to be reported on Form 1042-S.

Certain Types of Interest

• Interest on bank deposits or certain portfolio interest paid to non-resident aliens is often exempt from withholding. However, this interest is generally still reportable on Form 1042-S.

Connected Income

• Income that is “effectively connected” with a U.S. trade or business is subject to taxation at graduated rates, similar to U.S. persons. This income is not subject to the usual 30% withholding rate for non-effectively connected income, but it still must be reported on Form 1042-S.

Foreign Governments and International Organizations

• Payments made to foreign governments, international organizations, foreign central banks of issue, and certain of their wholly-owned instrumentalities might be exempt from tax and reporting.

Scholarship and Fellowship Payments

• These payments to nonresident alien students, trainees, or researchers for study, training, or research in the U.S. are generally reportable. However, a portion used for qualified tuition and related expenses might be exempt from tax (but might still be reportable).

Compensation for Personal Services

• There’s an annual exemption amount for compensation paid for personal services performed in the U.S. by a nonresident alien. The amount is set by the IRS, and any payment up to that amount might be exempt from tax but is still typically reportable on Form 1042-S.

Remember, even when no tax is withheld due to an exemption, the income may still need to be reported on Form 1042-S, depending on the specific circumstances. Also, the withholding agent or payer has the responsibility to determine if an exemption applies, which often requires collecting appropriate documentation from the payee.

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What is the deadline for filing a 1042-S?

The deadline for filing Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” with the IRS is typically March 15 of the year following the calendar year in which the income was paid to the foreign person.

In addition to filing with the IRS, withholding agents are also required to furnish a copy of Form 1042-S to the recipient of the income. This recipient copy should also be provided by March 15.

If March 15 falls on a weekend or holiday, the deadline will be the next business day.

If more time is needed to file, withholding agents can request an automatic 30-day extension by filing Form 8809, “Application for Extension of Time to File Information Returns,” by the due date of Form 1042-S. It’s possible to request an additional 30-day extension under certain hardship conditions, but the total extension period cannot exceed 60 days.

Remember that an extension to file does not extend the time to pay any tax due. If tax is owed (i.e., if there was under-withholding), it should be paid by the original due date to avoid potential interest and penalties.

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What is required to file a 1042-S?

To file Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” the withholding agent or payer must provide detailed information regarding the income paid to the foreign person and any tax withheld. Here are the primary elements and information required on the form:

Recipient’s Information

• Name, address, and country of the recipient
• Foreign taxpayer identification number (FTIN), if available
• U.S. taxpayer identification number (TIN), if available
• Chapter 3 and Chapter 4 status of the recipient

Withholding Agent’s Information

• Name, address, and employer identification number (EIN) or TIN of the withholding agent
• Contact information

Income and Withholding Details

• Gross amount of U.S. source income paid
• Description of the type of income (e.g., interest, dividends, royalties, etc.)
• Amount of federal tax withheld under Chapter 3 and Chapter 4 (if any)
• Rate of withholding, which can vary based on the type of income and any applicable tax treaties
• Amount repaid to the recipient if over-withholding occurred

Specific Income Code

• There are specific income codes to classify the type of income paid. The appropriate code should be selected based on the nature of the payment.

Exemption Code

• If an exemption from withholding applies, the appropriate exemption code needs to be entered. This can be due to a tax treaty, type of income, or status of the recipient.

Tax Treaty Information

• If benefits under a tax treaty are being claimed:
  • Country of residence for treaty purposes
  • Article of the treaty that provides the benefit
  • Reduced rate of withholding

Other Details

• Whether the income is effectively connected with a U.S. trade or business
• Information regarding “Qualified Intermediaries” or other withholding agents, if applicable
• Any additional withholding or reductions

Withholding Information under FATCA (Chapter 4)

• FATCA (Foreign Account Tax Compliance Act) requires reporting and withholding on certain payments to foreign financial institutions and other foreign entities. Chapter 4 status, withholding, and exemptions need to be reported if applicable.

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What are the penalties for 1042-S?

Failure to file Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” correctly and timely or failure to furnish correct statements to the recipients can result in penalties. Here’s a summary of the penalties related to Form 1042-S:

Late Filing or Failure to File

• For forms required to be filed after December 31, 2020, the penalty is $280 for each Form 1042-S that you fail to file on time without a reasonable cause.
• If the failure is due to intentional disregard, the penalty per form is $570 or, if greater, 10% of the total amount of items required to be reported, with no maximum.

Failure to Furnish Correct Payee Statements

• If you fail to provide correct statements to recipients by the due date and cannot show reasonable cause, the penalty is $280 for each statement you failed to provide.
• If the failure is due to intentional disregard, the penalty is $570 for each statement you failed to provide with no maximum.

Failure to File Electronically

• If you are required to file Form 1042-S electronically but fail to do so, and you don’t have an approved waiver, you may be subject to a penalty as well.
  • However, you can file up to 250 returns on paper; those filed in excess of 250 are subject to this penalty unless you have reasonable cause.

Failure to Report a Taxpayer Identification Number (TIN)

• If you fail to include the recipient’s TIN or include an incorrect TIN, you may be subject to a penalty unless you can show reasonable cause.

To avoid these penalties:

• Be sure to file on time.
• Double-check your forms for accuracy.
• Provide copies to recipients by the due date.
• Secure TINs from payees as needed.

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Do you need to e-file a 1042-S?

Unlike 1099s and W-2, the e-filing limit for 1042-S remains at 250 for 1042-S in 2023. The IRS has specific requirements regarding the electronic filing (e-filing) of Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding.”

• If you are required to file 250 or more Forms 1042-S, you must e-file.
• If you have fewer than 250 forms, e-filing is optional, but the IRS encourages it.

If you are mandated to e-file but fail to do so without an approved waiver, you may be subject to penalties unless you can establish reasonable cause for the failure.

If e-filing presents a hardship, you can request a waiver from the e-filing requirement by submitting Form 8508, “Request for Waiver From Filing Information Returns Electronically.” This waiver request should be submitted at least 45 days before the due date of Form 1042-S.

Remember, even if you e-file Form 1042-S with the IRS, you must still provide paper copies (or electronic copies if the recipient has consented to electronic delivery) of Form 1042-S to the income recipients.

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Is state filing required for the 1042-S?

Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” is a federal form used to report payments and withholding to non-U.S. individuals and entities. It is primarily filed with the Internal Revenue Service (IRS) to comply with federal tax obligations.

In general, Form 1042-S is not required for state tax purposes, and most states do not have a direct equivalent form or specific reporting requirement for these types of payments to foreign individuals or entities. 1099-Prep does not support state filing for 1042-S.

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What elements make up a 1042-S form?

Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” is used to report specific income types and associated withholdings for foreign persons. The form is detailed and captures various data points about the payment, the payer (or withholding agent), and the recipient. Here’s a breakdown of the key elements that make up Form 1042-S:

Box 1 – Income Code

All filers must enter the appropriate two-digit income code.

Box 2 – Gross Income

For each income type, enter the gross amount you paid (in whole dollars) to or on behalf of the recipient during the calendar year, including withheld tax

Box 3 – Chapter indicator

If you are reporting amounts in boxes 7 through 9, enter either a “3” or “4” to indicate whether the amounts were withheld (or paid by the withholding agent) pursuant to chapter 3 or chapter 4. If you are reporting tax withheld under section 5000C, or backup withholding was applied under the presumption rules, enter “3” as if the tax were a chapter 3 tax.

Box- 3a Chapter 3 Exemption Code

If the tax rate you entered in box 3b is 00.00, you may be required to enter the appropriate exemption code (01 through 24) as applicable for chapter 3 purposes.

Box- 3b Chapter 3 Tax Rate

Enter the correct rate of withholding that applies to the income in box 2 (gross income) or box 6 (net income), as appropriate.

Box- 4a Chapter 4 Exemption Code

If the tax rate you entered in box 4b is 00.00, you may be required to enter the appropriate exemption code (01 through 24) as applicable for chapter 4 purposes.

Box- 4b Chapter 4 Tax Rate

Enter the correct rate of withholding that applies to the income in box 2 (gross income) or box 6 (net income), as appropriate.

Box 5 – Withholding Allowance

This box should be completed only if the income code reported in box 1 is 16 (scholarship or fellowship grants), 17 (compensation for independent personal services), 18 (compensation for dependent personal services), 19 (compensation for teaching), 20 (compensation during studying and training), or 42 (earnings as an artist or athlete-no central withholding agreement). If you are a designated withholding agent that has entered into a central withholding agreement with the IRS, leave this box blank and report the gross amount paid to the recipient in box 2.

Box 6 – Net Income Complete

This box only if you entered an amount in box 5. Otherwise, leave it blank.

Box 7a – Federal tax withheld

Enter the total amount of U.S. federal tax you actually withheld in box 7a under chapter 3 or 4. If you did not withhold any tax, enter “-0-.”

Box 7b – Check if federal tax withheld was not deposited with the IRS because escrow procedures were applied

A withholding agent that withheld tax during the calendar year and that was not required to deposit with the IRS the tax withheld during the calendar year pursuant to the escrow procedure must check box 7b (federal tax withheld was not deposited with the IRS because escrow procedures were applied).

Box 7c – Check if withholding occurred in subsequent year with respect to a partnership interest

Check box 7c if you are a partnership that received an amount subject to withholding during the 2023 calendar year (preceding year) and you are withholding on the amount includible in a foreign partner’s share after March 15 of the subsequent year (2024). Only check this box if you designated the deposit as attributable to the preceding year (2023). In such a case, the partnership will be required to report the associated income and tax withheld on Forms 1042 and 1042-S for the preceding year.

Box 8 –Tax Withheld by other agents

If you are a withholding agent filing a Form 1042-S to report income that has already been subject to withholding by another withholding agent, enter the amount actually withheld by the other agent(s) in box 8.

Box 9 – Over withheld tax repaid to recipient pursuant to adjustment procedures

Over withheld tax repaid to recipient pursuant to adjustment procedures. This box should be completed only if you repaid a recipient under the reimbursement or set-off procedure during the 2024 calendar year. The amount in this box is negative.

Box 10 – Total withholding credit

Enter in box 10 the combined amounts reported in box 7a (federal tax withheld), box 8 (tax withheld by other agents), and box 9 (over withheld tax repaid to recipient pursuant to adjustment procedures).

Box 11 – Tax paid by withholding agent (amounts not withheld)

Enter the total amount of tax paid by you and not withheld from the payment to the recipient. The amounts reported in box 11 should be the amounts paid by the withholding agent from its own funds rather than through withholding from the payment to the recipient. Any amount reported in this box must not be included in box 10.

Box 12 – Withholding Agent

Box12a – Withholding Agent’s Employer Identification Number (EIN)

You are required to enter your EIN.

Boxes 12b – Withholding Agent’s Chapter 3 Status Code

Enter the withholding agent status code(s) from the list of Recipient Status Codes. You must enter both a chapter 3 and a chapter 4 withholding agent status code regardless of the type of payment being made.

Boxes 12c – Withholding Agent’s Chapter 4 Status Code

Enter the withholding agent status code(s) from the list of Recipient Status Codes. You must enter both a chapter 3 and a chapter 4 withholding agent status code regardless of the type of payment being made.

Boxes 12d – Withholding Agent’s Name

This box is for the Withholding agent’s name.

Boxes 12e – Withholding Agent’s GIIN

The GIIN provided, if any, should be the GIIN issued to the branch of, or disregarded entity owned by, the participating FFI or registered deemed-compliant FFI that is making the payment. Box 12f, Country code. You must enter the code (from the list at IRS.gov/ CountryCodes) for the country for which you are resident under that country’s tax laws.

Boxes 12f – Withholding Agent’s Country Code

You must enter the code for the country of which the withholding agent claims residency under that country’s tax laws. Enter “OC” (other country) only when the country of residence does not appear on the list or the payment is made to an international organization.

Boxes 12g – Withholding Agent’s Foreign TIN

This box is for the Withholding agent’s foreign TIN if available.

Boxes 12h – Withholding Agent’s Address

This box is for the Withholding agent’s address.

Boxes 12i – Withholding Agent’s City/State/Zip

This box is for the Withholding agent’s city, state, and zip.

Box 13 – Recipient

Box 13a – Recipient’s Name

Enter the complete name of the recipient in box 13a. If you do not know the name of the recipient, or are required to use the recipient status codes for an unknown recipient, enter “Unknown Recipient.”

Box 13b – Recipient’s country code

You must enter the code for the country of which the recipient claims residency under that country’s tax laws. Enter “OC” (other country) only when the country of residence does not appear on the list or the payment is made to an international organization.

Box 13c – Recipient’s Address

This box is for the recipient’s address.

Box 13d – Recipient’s Address Line 2

This box is for the recipient’s city, state, and zip.

Box 13e – Recipient’s TIN

You must obtain and enter a U.S. TIN for any of the following recipients. Any recipient whose income is effectively connected with the conduct of a trade or business in the United States. For these recipients (excluding a recipient receiving a payment subject to section 1446(a) or (f) withholding), enter exemption code 01 in box 3a.

Box 13f – Recipient’s Ch. 3 Status Code

This box is for the recipient’s Chapter 3 Status Code.

Box 13g – Recipient’s Ch. 4 Status Code

This box is for the recipient’s Chapter 4 Status Code.

Box 13h – Recipient’s GIIN

You must include a GIIN if you are required to collect a GIIN for the recipient under the requirements documenting the payee under chapter 4. If you make a payment to a disregarded entity or branch that is identified in Part II of Form W-8BEN-E, then report the GIIN of the disregarded entity or branch provided in that section. Boxes 13f and 13g, Recipient’s Chapter 3 and Chapter 4 Status Codes Enter the recipient status code from the list of Recipient Status Codes in Appendix B, later. The following special instructions apply for chapter 3 status codes.

Box 13i – Recipient’s foreign tax identification number

Use this box to enter the recipient’s identification number used in the recipient’s country of residence for tax purposes, if any.

Box 13j – Recipient’s LOB Code

If you are making a payment for which a beneficial owner that is an entity has claimed a reduced rate of withholding under an income tax treaty and has provided documentation that establishes the limitation on benefits (LOB) article under which the beneficial owner qualifies, enter the applicable LOB code.

Box 13k – Recipient’s account number

Recipient’s Account Number If you are a financial institution reporting amounts paid to your direct account holder with respect to an account maintained by you at your U.S. office or U.S. branch, you must report the recipient’s account number in box 13k. If the amount is paid through an NQI or flow-through entity, you are not required to use this box.

Box 13l – Recipient’s date of birth

Use this box to enter the recipient’s date of birth. The correct format if entered is YYYYMMDD.

Box 14 – Primary Withholding Agent

Box 14a – Primary Withholding Agent’s Name

Primary Withholding Agent’s EIN If you are an intermediary or flow-through entity reporting amounts withheld by another withholding agent (the primary withholding agent) in box 8, you must provide the name and EIN of the withholding agent that withheld the tax. If multiple withholding agents withheld amounts reported on the same Form 1042-S, report the name of any one of the withholding agents that withheld amounts. Otherwise, leave blank.

Box 14b – Primary Withholding Agent’s EIN

Boxes 14a and 14b, Primary Withholding Agent’s EIN If you are an intermediary or flow-through entity reporting amounts withheld by another withholding agent (the primary withholding agent) in box 8, you must provide the name and EIN of the withholding agent that withheld the tax. If multiple withholding agents withheld amounts reported on the same Form 1042-S, report the name of any one of the withholding agents that withheld amounts. Otherwise, leave blank.

Box 15 – Pro-Rata Basis Reporting Checkbox

Withholding agents must check box 15 to notify the IRS that an NQI that used the alternative procedures failed to properly comply with those procedures.

Box 15 – Intermediary/ Flow-Through Entity

If you are reporting amounts subject to reporting for chapter 3 or 4 purposes paid to a recipient whose withholding certificates or other documentation has been submitted to you (or should have been submitted to you) with a Form W-8IMY provided by an intermediary or flow-through entity, you must include the name and address of the intermediary or flow-through entity with whose Form W-8IMY the recipient’s Form W-8 or other documentation is associated.

Box 15a – Intermediary or flow-through entity’s EIN

This box is for the Intermediary or flow-through entity’s EIN, if any.

Box 15b – Ch. 3 status code

This box is for the Intermediary or flow-through entity’s Chapter 3 Status Code.

Box 15c – Ch. 4 status code

This box is for the Intermediary or flow-through entity’s Chapter 4 Status Code.

Box 15d – Intermediary or flow-through entity’s name

This box is for the Intermediary or flow-through entity’s Name.

Box 15e – Intermediary or flow-through entity’s GIIN

This box is for the Intermediary or flow-through entity’s GIIN.

Box 15f – Intermediary or flow-through entity country code

You must enter the country code for the country where the intermediary or flow-through entity is located.

Box 15g – Foreign tax identification number

Enter the intermediary or flow-through entity’s identifying number used in the country of residence for tax purposes, if any.

Box 15h – Address

This box is for the Intermediary or flow-through entity’s address.

Box 15i – City or town

This box is for the Intermediary or flow-through entity’s city/state/zip.

Box 16 – Payer

Include the payer’s name, TIN, and GIIN if different from the withholding agent shown. If payment is being made by a transfer agent or a paying agent acting as a withholding agent on behalf of a payer, enter the chapter 3 and 4 status codes applicable to the status of the payer.

Box 16a – Payer’s Name

This box is for the Payer’s Name.

Box 16b – Payer’s TIN

This box is for the Payer’s TIN.

Box 16c – Payer’s GIIN

This box is for the Payer’s GIIN.

Box 16d – Payer’s Ch. 3 Status Code

This box is for the Payer’s Chapter 3 Status Code.

Box 16e – Payer’s Ch. 4 Status Code

This box is for the Payer’s Chapter 4 Status Code.

Box 17a – State income tax withheld

Note, 1042-S information is not reported to states in 1099-Prep. If the any state income tax is withheld, the amount is reported in this box.

Box 17b-17c – Payer’s state tax no/Name of state

Note, 1042-S information is not reported to states in 1099-Prep. This box indicates the state for which the income and tax details are being reported. It will also include the payer’s state identification number, which is an identifier assigned by the state’s revenue or taxation department.

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Can you correct a 1042-S?

A 1042-S can be corrected, but this functionality is not currently available in 1099-Prep.

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