What is the Form 1042-S?
The IRS Form 1042-S facilitates reporting various types of payments made to foreign individuals or entities. These payments are subject to reporting and withholding requirements under Chapter 3 of the Internal Revenue Code. In this article, we are going to look at the specific payments that are subject to form 1042-S reporting.
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.
Overview of Payments Subject to Form 1042-S Reporting?
Businesses and organizations must accurately identify and report these payments on 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 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.