A payment generally requires Form 1042-S reporting when a withholding agent pays U.S.-source income that is reportable under Chapters 3 or 4 to a foreign person. This commonly includes U.S.-source interest, dividends, rents, royalties, compensation and certain other FDAP income. A Form 1042-S may still be required when no tax was withheld because a tax treaty or Internal Revenue Code exemption applies.
US tax laws can be tricky to navigate, especially when it comes to the reporting requirements. One of those requirements that always seems to raise questions is the kind of payments subject to 1042-S Reporting.
This form is key to reporting certain income paid and withheld to foreign persons, including non-resident aliens and foreign corporations. Whether you are an organization paying or international individual earning income from US sources, knowing what payments are 1042-S reportable is crucial for compliance and avoiding penalties.
In this article we will go into the details of the Form 1042-S, the types of payments that are 1042-S reportable and the reporting process, so you are informed and prepared.
What is the Form 1042-S?
A Form 1042-S is an annual withholding tax return used by a withholding agent or intermediary who receives, controls, has custody of, disposes of, or pays a chapter 4 withholdable payment or an amount subject to chapter 3 withholding. The form is used to report these amounts paid during the preceding calendar year.
Withholding agents who are individuals are not required to report a payment on Form 1042-S if they are not making the payment as part of their trade or business and no withholding is required to be made on that payment. If withholding is required, a Form 1042-S must be filed, even if the individual did not withhold.
What type of income is subject to Form 1042-S reporting?
Various payment types are subject to reporting on Form 1042-S. Here are four categories of payments that are typically subject to Form 1042-S reporting:
Nonresident Alien (NRA) Wages: Wages or compensation paid to non-U.S. persons in the U.S. are typically reported on Form 1042-S. This covers salaries, bonuses, and other compensation for foreign individuals not U.S. citizens or residents for tax purposes. U.S. citizens or residents for tax purposes generally report these payments on the Form W-2.
Scholarships and Fellowships: Payments made to foreign students or researchers in the form of scholarships, fellowships, or grants are usually subject to Form 1042-S reporting. These payments often include tuition waivers, stipends, or other financial support provided to non-U.S. individuals for educational or research purposes.
Royalties and Rent: Income earned by foreign individuals or entities from royalties or rental activities in the United States is typically subject to Form 1042-S reporting. This includes payments made for the use of intellectual property, such as patents or copyrights, as well as rental income from real estate located within the United States.
Dividends and Interest: If a foreign person or entity receives dividends from a U.S. corporation or a qualified foreign corporation or earns interest income from U.S. sources, the withholding agent must report those payments on Form 1042-S. The withholding rate on dividends and interest is generally 30%, unless a lower treaty rate or IRC exemption applies.
Other Fixed or Determinable Annual or Periodic (FDAP) Income: Various types of FDAP income, such as certain types of prizes or awards paid to foreign individuals or entities are subject to Form 1042-S reporting. As a reminder, individuals must withhold taxes on FDAP income, which is income that is fixed, determinable, annual, or periodic, unless an exemption or reduced rate applies under a tax treaty.
| Payment type | Potentially 1042-S reportable? | Key consideration |
|---|---|---|
| U.S.-source dividends | Yes | Recipient status and treaty eligibility |
| U.S.-source interest | Yes | Certain exemptions may apply |
| Royalties | Yes | Source generally depends on where IP is used |
| Rent | Yes | Location of property matters |
| Compensation for services | Yes | Where services are performed matters |
| Scholarships/fellowships | Often | Qualified vs. nonqualified amounts matter |
| Prizes and awards | Often | Source and recipient status matter |
| Effectively connected income | Special rules | May still require 1042-S reporting |
| Foreign-source income | Generally not under ordinary Chapter 3 rules | Source determination is critical |
What Payments Aren’t Subject to Form 1042-S Reporting?
Amounts NOT subject to reporting under chapter 3:
- Payments made by individuals if the individuals are not making the payment as part of their trade or business and no withholding is required to be made.
- Bank deposit interest that is not effectively connected with the conduct of a U.S. trade or business.
- Original issue discount on certain short-term obligations.
- Nonbusiness gambling income of a nonresident alien playing blackjack, baccarat, craps, roulette, or big-6 wheel in the United States.
- Amounts paid as part of the purchase price of an obligation sold between interest payment dates.
- Original issue discount paid on the sale of an obligation other than a redemption.
- Insurance premiums paid on a contract issued by a foreign insurer.
Amounts NOT subject to reporting under chapter 4:
- Interest or original issue discount from a short-term obligation.
- Payments of U.S. source FDAP income made prior to January 1, 2017, with respect to an offshore obligation.
- Payments made prior to January 1, 2017, by a secured party with respect to collateral that secures certain transactions under certain collateral arrangements.
- Withholdable payments made prior to July 1, 2016, with respect to a preexisting obligation for which a withholding agent does not have documentation indicating that the payee is a nonparticipating FFI.
- Payments made under a grandfathered obligation (e.g., obligations outstanding on July 1, 2014).
Overview of Withholdable Payments Subject to Form 1042-S Reporting?
Businesses and organizations must accurately identify and report these payments on a Form 1042-S. This ensures compliance with Chapters 3 and 4 of the Internal Revenue Code.
Failure to do so can result in IRS penalties, including uncapped intentional disregard penalties. It is also important to note that, unlike Form 1099 reporting, there are no exempt recipients or payment thresholds.
If you determine that a payment made to a non-U.S. person falls within scope, indicating that it is a U.S.-sourced FDAP payment made to a nonresident alien, then you should generally report it on a Form 1042-S.
When it comes to Form 1042-S reporting, Forms W-8 play a critical role in withholding and reporting correctly.
Learn more about W-8 collection and validation of Form 1042-S reporting?
Learn about the benefits of upfront W-8 collection and validation of Form 1042-S reporting in our session with Sovos. Wendy Walker and Jessica Metts explain how tax documents, such as W-8s, affect Form 1042-S reporting directly.
Form 1042-S: https://www.irs.gov/pub/irs-pdf/f1042s.pdf
More information about Form 1042-S: https://www.irs.gov/forms-pubs/about-form-1042-s
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Frequently Asked Questions
Yes, in some cases. Form 1042-S may still be required even when no U.S. federal income tax was withheld. For example, a payment may qualify for a reduced or 0% withholding rate under an applicable tax treaty or an exemption under the Internal Revenue Code while remaining reportable on Form 1042-S. Reporting and withholding requirements should therefore be considered separately.
It depends on the source and type of income. Compensation paid to a foreign person for services performed in the United States may be subject to Form 1042-S reporting and withholding. If the services are performed outside the United States, the income may be considered foreign-source and generally may not be subject to Chapter 3 withholding and Form 1042-S reporting. The payee’s documentation and the specific circumstances of the payment should always be reviewed.
Forms W-8 help a withholding agent establish a foreign payee’s status and determine the appropriate U.S. withholding and reporting treatment. Depending on the form and circumstances, the documentation may establish foreign status, support a claim for treaty benefits, identify the beneficial owner, or provide other information needed for Chapter 3 or Chapter 4 purposes. If valid documentation is not available, applicable presumption and withholding rules may need to be considered.
Are your payments subject to Form 1042-S reporting?
