On November 7, 2024, the U.S. Internal Revenue Service (IRS) released draft instructions for the 2025 Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. This follows the earlier publication of the draft Form 1042-S on September 5, 2024. Please find a summary of the key updates below:
Key Updates in the Draft Form 1042-S Instructions
Extension Requests
The draft instructions outline the process for requesting a 30-day extension to furnish copies of Form 1042-S to recipients using Form 15397 (Application for Extension of Time to Furnish Recipient Statements). This request must be submitted by fax and received by the original due date for furnishing the recipient copies.
New Box 7d
A major addition to the 2025 Form 1042-S is box 7d, designed to simplify reporting for qualified intermediaries (QIs), withholding foreign partnerships (WPs), and withholding foreign trusts (WTs). Under specific conditions, these entities can report withholding amounts in aggregate pools rather than individually. However, if a recipient requests payee-specific reporting for amounts previously pooled, box 7d is used on the new Form 1042-S issued to the recipient and on the amended form that revises the withholding pool amounts.
When revisions occur after filing Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons), it is necessary to amend Form 1042 to reflect the updated totals in lines 61a or 61b. This ensures accurate and consistent reporting.
New Income and Status Codes
The updated form introduces three new income codes:
- 59: Consent fees
- 60: Loan syndication fees
- 61: Settlement payments
These codes apply when payments don’t fit other specified income categories, excluding code 23 (other income).
Additionally, two new Chapter 3 status codes have been added:
- 40: Partnership QDD (Qualified Derivatives Dealer) for reporting partner allocations tied to QDD items.
- 41: U.S. government or tax-exempt entities other than section 501(c) entities, such as colleges or universities.
The instructions clarify that status code 40 should not be used to report payments to a QDD itself, which should use code 35.
Country Code Updates
The draft instructions now permit using “US” in box 13b (recipient’s country code) for income codes 27 (PTP distributions under IRC section 1446(a)) and 57 (amount realized under IRC section 1446(f)).
Future Changes
Looking ahead to the 2026 reporting year, the IRS intends to require a Chapter 3 exemption or reduced withholding tax rate code where tax withheld is less than 30%.
These updates aim to enhance the clarity and accuracy of Form 1042-S reporting.
Links to both the 2025 draft Form 1042-S and instructions can be found below:
- Draft Form 1042-S: https://www.irs.gov/pub/irs-dft/f1042s–dft.pdf
- Draft Form 1042-S Instructions: https://www.irs.gov/pub/irs-dft/i1042s–dft.pdf
Looking to dive deeper into these updates and understand their implications? Gain valuable insights from our subject matter experts by downloading our comprehensive Year-End Guide. This resource provides in-depth analysis and practical tips to help you navigate the changes effectively and ensure compliance with the latest IRS requirements.
