What Form 1042 Is For

Form 1042 is the annual tax return that U.S. businesses and financial institutions use to report taxes they've withheld from payments made to foreign persons. Think of it as a summary report that tells the IRS: "Here's all the money we paid to foreign individuals and companies this year, and here's the tax we held back from those payments."

Who are "foreign persons"? This includes nonresident aliens (foreign individuals), foreign partnerships, foreign corporations, foreign estates, and foreign trusts. When these entities receive certain types of U.S.-source income—such as interest, dividends, royalties, or rent—the payer (called a "withholding agent") must typically withhold a portion as tax before sending the payment.

The form serves as the reconciliation document between what was withheld throughout the year and what was deposited with the IRS. It works hand-in-hand with Form 1042-S, which provides detailed information about each individual payment to each foreign recipient. While Form 1042-S tells the story of individual transactions, Form 1042 provides the big picture for the entire year.

For the 2010 tax year, Form 1042 was required if you issued any Forms 1042-S (whether or not tax was actually withheld) or if you paid gross investment income to foreign private foundations subject to tax under section 4948(a) IRS.gov.

When You’d Use Form 1042 (Late/Amended Filings)

Standard Filing Deadline

Form 1042 for the 2010 calendar year was due by March 15, 2011. The form had to be mailed to the IRS Ogden Service Center in Utah.

Extensions

If you needed more time, you could file Form 7004 to request an automatic extension. However, this extension only gave you more time to file the paperwork—not more time to pay any taxes owed. The taxes themselves were still due by the original March 15 deadline IRS.gov.

Special Extension for 2010

If you made substitute dividend payments (a specialized transaction involving securities lending) after September 13, 2010, you qualified for an automatic six-month extension to file both Form 1042 and the related Forms 1042-S.

Amended Returns

Mistakes happen. If you discovered errors after filing your original Form 1042, you needed to file an amended return. To do this, you used a blank 2010 Form 1042, checked the "Amended Return" box at the top, completed the entire form with corrected information, and attached a statement explaining what you were correcting and why. The entire form had to be redone—you couldn't just submit changes IRS.gov.

Important exception: You should not file an amended Form 1042 simply to recover taxes that were overwithheld in the prior year. The instructions provided specific procedures for overwithholding adjustments that didn't involve amending the return.

Key Rules or Details for 2010

Electronic Deposit Requirement

While 2010 allowed some flexibility, withholding agents were strongly encouraged to use the Electronic Federal Tax Payment System (EFTPS) for all deposits. As of January 1, 2011, electronic deposits became mandatory, so paper deposit coupons (Forms 8109 and 8109-B) were phased out IRS.gov.

Deposit Timing Rules

How often you needed to deposit withheld taxes depended on the amount:

• $2,000 or more at the end of any quarter-monthly period (the 7th, 15th, 22nd, or last day of the month): Deposit within 3 business days
• $200 to $1,999 at the end of a month: Deposit within 15 days after month-end
• Under $200 at year-end: Could be paid with your Form 1042 by March 15, 2011

Foreign Partners Rule

A significant clarification affected U.S. partnerships with foreign partners in 2010. The tax liability for a foreign partner's distributive share didn't need to be reported on lines 1-60 of Form 1042 until the earlier of: (a) when the partnership actually distributed the income, or (b) when it sent Schedule K-1 to the partner. This prevented partnerships from having to report tax liability on undistributed earnings IRS.gov.

Qualified Investment Entities

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended special treatment for regulated investment companies (RICs) as qualified investment entities, effective January 1, 2010 IRS.gov.

Reconciliation Requirement

The amounts reported on Form 1042 had to reconcile with all Forms 1042-S filed (whether on paper or electronically). This reconciliation was critical to avoid IRS correspondence and potential audits.

Step-by-Step (High Level)

Step 1: Gather Your Records

Throughout 2010, you should have maintained records of all payments made to foreign persons and all taxes withheld. This included copies of withholding certificates (like Forms W-8BEN) that foreign recipients provided.

Step 2: Prepare Forms 1042-S

Before completing Form 1042, you needed to prepare a Form 1042-S for each foreign recipient who received reportable payments. These forms detailed the income paid and taxes withheld for each individual or entity.

Step 3: Complete Form 1042-T

If you filed paper Forms 1042-S, you used Form 1042-T as a transmittal document to send them to the IRS.

Step 4: Calculate Total Tax Liability

Using the "Record of Federal Tax Liability" section on Form 1042, you documented your tax liability for each period throughout 2010. This monthly breakdown had to match the deposits you made throughout the year.

Step 5: Reconcile Totals

Line 62a (gross income paid) needed to equal the sum of all amounts in box 2 of all your Forms 1042-S. Line 62b (taxes withheld) needed to equal the sum of amounts in box 7 and box 8, minus box 10, on all Forms 1042-S. These reconciliations were critical IRS.gov.

Step 6: Report Deposits

On line 64, you reported the total tax deposits you made during 2010 (including any amounts paid with an extension).

Step 7: Calculate Balance Due or Overpayment

The form calculated whether you owed additional tax or had overpaid. If you overpaid, you could request either a refund or a credit toward your 2011 deposits.

Step 8: Sign and Mail

The form required a signature. You mailed it to the Ogden Service Center by March 15, 2011 (or by your extended deadline).

Common Mistakes and How to Avoid Them

Mistake #1: Reconciliation Errors

The most common problem was failing to reconcile Form 1042 with Forms 1042-S. The totals on Form 1042 must match the sum of all individual Forms 1042-S. Solution: Create a spreadsheet tracking all Forms 1042-S before completing Form 1042, and double-check that line 62a equals the sum of all box 2 amounts and line 62b matches the tax calculations.

Mistake #2: Missing or Incorrect EIN

Withholding agents sometimes forgot to enter their Employer Identification Number or used the wrong type of EIN. Qualified intermediaries and withholding foreign partnerships needed to use their special QI-EIN, WP-EIN, or WT-EIN numbers, not their regular EINs IRS.gov. Solution: Verify which type of EIN applies to your situation and double-check the number before filing.

Mistake #3: Improper Deposit Timing

Many filers misunderstood the deposit rules and made deposits too late. Solution: Set up calendar reminders for quarter-monthly periods (7th, 15th, 22nd, and last day of each month) and track your cumulative undeposited amounts to know when the 3-day or 15-day deposit rules trigger.

Mistake #4: Failing to File When Required

Some withholding agents didn't realize they needed to file Form 1042 even when no tax was withheld, as long as they filed any Forms 1042-S. Solution: File Form 1042 whenever you file Forms 1042-S, regardless of whether actual withholding occurred.

Mistake #5: Incorrect Treatment of Overwithholding

Withholding agents often handled overwithholding corrections improperly. If overwithholding was discovered before March 15, 2011, you could use the reimbursement or set-off procedure. But if discovered later, the foreign recipient had to claim the refund on their own tax return IRS.gov. Solution: Review all withholding amounts before March 15 and use the appropriate adjustment procedure outlined in the instructions.

Mistake #6: Not Checking the Right Box

Qualified intermediaries needed to check the "QI/Withholding foreign partnership or trust" box, while nonqualified intermediaries needed to check the "NQI/Flow-through entity" box. Checking the wrong box (or neither) caused processing delays. Solution: Carefully review your status and mark the appropriate box.

Mistake #7: Filing Incomplete Amended Returns

When filing an amended return, you couldn't just submit the changes—you had to complete the entire form again. Solution: Use a fresh Form 1042, check the "Amended Return" box, fill out all sections completely, and attach a detailed explanation.

What Happens After You File

Immediate Processing

After mailing Form 1042 to the Ogden Service Center, the IRS processed your return and matched it against the Forms 1042-S you filed. This reconciliation process ensured that the withholding you reported matched the individual recipient statements.

If You Owe Money

If line 68 showed a balance due, you needed to pay it by the filing deadline to avoid penalties and interest. Interest accrued from the original due date (March 15, 2011) even if you had an extension to file. The late payment penalty was typically 0.5% per month of the unpaid tax, up to 25% maximum IRS.gov.

If You’re Due a Refund

If you overpaid, you indicated on line 71 whether you wanted a refund or credit. A refund meant the IRS would send you a check. A credit meant the overpayment would reduce your required deposits for 2011. Refund requests for qualified intermediaries required attaching supporting Forms 1042-S to verify the claimed amounts IRS.gov.

IRS Correspondence

If the IRS found discrepancies between Form 1042 and your Forms 1042-S, or if calculations didn't match deposits, you'd receive a notice requesting clarification or proposing adjustments. Responding promptly with documentation could resolve issues quickly.

Penalty Assessment

The IRS automatically calculated penalties if applicable. Late filing triggered a penalty of 5% of unpaid tax per month (up to 25%). Failure to deposit tax when due resulted in penalties ranging from 2% (1-5 days late) to 15% (more than 10 days after an IRS demand notice) IRS.gov. You didn't need to calculate these yourself—the IRS would bill you.

Record Retention

You needed to keep all records related to Form 1042—including Forms 1042-S, withholding certificates (Forms W-8), deposit records, and supporting documentation—as long as they might be relevant to IRS administration of tax law. Generally, this meant keeping records for at least three years after filing, though longer retention was prudent.

Third-Party Communication

If you checked "Yes" in the Third Party Designee section, the IRS could discuss your Form 1042 with your designated representative (such as your accountant). This authorization automatically expired one year after the due date IRS.gov.

FAQs

Q1: What's the difference between Form 1042 and Form 1042-S?

Form 1042-S reports the details of individual payments to specific foreign recipients—it's like a W-2 or 1099 for foreign persons. You file one Form 1042-S for each foreign recipient who received reportable payments. Form 1042 is the summary return that reports the total withholding for all foreign recipients combined. Think of Forms 1042-S as the supporting details and Form 1042 as the cover sheet that ties everything together.

Q2: Do I need to file Form 1042 if no tax was actually withheld?

Yes, you must file Form 1042 if you filed any Forms 1042-S, even if those forms show zero withholding. The filing requirement triggers from issuing Forms 1042-S, not from the amount of tax withheld. You also must file if you paid gross investment income to foreign private foundations subject to tax under section 4948(a) IRS.gov.

Q3: What happens if I miss the March 15 deadline?

File as soon as possible even if you're late. You'll face a penalty of 5% of any unpaid tax for each month or partial month the return is late, up to 25% maximum. You'll also owe interest on unpaid tax from March 15 forward IRS.gov. However, filing late is better than not filing at all—penalties can be more severe for non-filing, and the IRS may assess penalties and interest administratively.

Q4: Can I file Form 1042 electronically?

For the 2010 tax year, Form 1042 itself generally had to be filed on paper and mailed to Ogden, Utah. However, Forms 1042-S could be filed electronically, and you still needed to file the paper Form 1042 even if your Forms 1042-S were filed electronically. Electronic filing requirements have expanded in subsequent years, but 2010 required paper submission of Form 1042.

Q5: What if I discover I withheld too much tax?

The timing of your discovery determines your options. If you discovered the overwithholding by March 15, 2011, you could use undeposited amounts to repay the recipient and reduce your tax liability. If all tax was already deposited, you could use either the "reimbursement procedure" (repay the recipient with your own funds by March 15, 2011, then reduce subsequent deposits) or the "set-off procedure" (reduce future withholding to the same recipient). If you discovered the error after March 15, 2011, the foreign recipient had to claim the refund on their own U.S. tax return—you couldn't adjust your Form 1042 IRS.gov.

Q6: I'm a U.S. partnership with foreign partners. When do I report the withholding tax?

For the 2010 tax year, the rules were clarified: You report tax liability on lines 1-60 of Form 1042 in the year following the year you earned the income—specifically in the period when you either (1) actually distributed the foreign partner's share, or (2) sent or were required to send Schedule K-1 to the foreign partner, whichever came first. This meant you didn't report withholding liability on undistributed earnings in the year earned IRS.gov.

Q7: What should I do if I made a mistake on my original Form 1042?

File an amended Form 1042 using a 2010 form, checking the "Amended Return" box at the top. You must complete the entire form with all corrected information—you can't just submit a partial correction. Attach a detailed statement explaining what you're correcting and why. However, don't amend Form 1042 simply to recover overwithholding from a prior year—that requires the foreign recipient to claim a refund on their own return IRS.gov.

Additional Resources

For complete details, refer to the 2010 Instructions for Form 1042 available at IRS.gov.

For technical assistance with Form 1042, the IRS International Section could be reached at 267-941-1000 or by writing to Internal Revenue Service, International Section, Philadelphia, PA 19255-0525.

This guide provides general information about Form 1042 for the 2010 tax year based on official IRS instructions. It is not a substitute for professional tax advice. Consult a qualified tax professional for guidance specific to your situation.