What Form 1042 Is For

Form 1042 is the annual tax return that U.S. businesses and individuals (called "withholding agents") must file to report income taxes withheld from payments made to foreign persons. Think of it as the international cousin of the W-2 system—when you pay money to someone outside the United States, you often need to withhold a portion for taxes and report it to the IRS.

Who needs to file? Any person or organization that controls, receives, or pays certain types of U.S.-source income to foreign individuals or entities. This includes corporations, partnerships, trusts, estates, nonprofits, and even individuals making business-related payments. You're considered a "withholding agent" if you have control over income payments subject to withholding—and with that role comes legal responsibility.

The form covers various income types paid to foreign persons: interest, dividends, rents, royalties, compensation for services performed in the U.S., pension distributions, gambling winnings, and effectively connected business income. For 2011, the form also included a new 2% excise tax on "specified federal procurement payments"—money paid under government contracts entered into after January 1, 2011, for goods manufactured or services provided in countries without international procurement agreements with the United States.

Importantly, you must file Form 1042 even if you didn't actually withhold any tax—perhaps because a tax treaty eliminated the tax, or the income qualified for an exemption. The IRS still wants to know about these payments. Form 1042 works hand-in-hand with Form 1042-S, which provides detailed recipient-level information, and Form 1042-T, which transmits paper copies of Form 1042-S.

When You’d Use It (Due Dates, Late Filing, and Amended Returns)

Standard Deadline

Form 1042 for calendar year 2011 was due March 15, 2012. Mail it to: Ogden Service Center, P.O. Box 409101, Ogden, UT 84409. This deadline applies to both the return itself and the accompanying Forms 1042-S (individual recipient statements).

Extension Requests

If you need more time, file Form 7004 (Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns) before the March 15 deadline. This grants an automatic extension to file—but crucially, it does not extend the time to pay any taxes due. You must still deposit all withheld taxes on time, or you'll face penalties and interest even if your filing extension is approved.

Late Filing

Missing the deadline triggers serious consequences. The penalty for filing late is 5% of the unpaid tax for each month (or part of a month) the return is late, with a maximum penalty of 25% of the unpaid tax. Late payment carries a separate penalty of 0.5% of unpaid tax per month, also capped at 25%. These penalties compound—if you file late and pay late, both penalties apply. Additionally, interest accrues on all unpaid taxes from the due date until payment, calculated at rates determined under Internal Revenue Code section 6621.

Amended Returns

Discovered an error after filing? Use another Form 1042 (for 2011) and check the "Amended Return" box at the top. You must complete the entire form with corrected information and attach a detailed statement explaining what you're changing and why (for example, "correcting mathematical error in May tax liability calculation"). If you're also amending Forms 1042-S, follow the separate amendment procedures in the Form 1042-S instructions. However, don't amend Form 1042 solely to recover taxes you discovered were overwithheld in a prior year—there are separate adjustment procedures for that situation.

Key Rules and Requirements for 2011

Deposit Requirements

The 2011 tax year marked a significant shift—withholding agents were required to make all tax deposits electronically using the Electronic Federal Tax Payment System (EFTPS). Failure to use EFTPS could result in a 10% penalty. The deposit schedule depends on how much tax you withhold:

• $2,000 or more at quarter-month end (7th, 15th, 22nd, or last day of month): Deposit within 3 business days
• $200 to $1,999 at month-end: Deposit within 15 days after month-end
• Less than $200 at year-end: Either deposit by March 15, 2012, or pay with your Form 1042

For EFTPS deposits to be timely, you must initiate them by 8 p.m. Eastern time the day before the due date. Planning ahead is essential—same-day wire payments are available as a backup option but require advance arrangements with your financial institution and typically incur fees.

Electronic Filing Threshold

If you file 250 or more Forms 1042-S, electronic filing was mandatory in 2011. This requirement applies separately to original and amended returns. The IRS encouraged electronic filing even below this threshold through the Filing Information Returns Electronically (FIRE) System. Withholding agents needing hardship waivers could request them using Form 8508, filed at least 45 days before the due date.

Special Situations

Qualified Intermediaries (QIs) and Withholding Foreign Partnerships/Trusts

These entities must use their special identification numbers (QI-EIN, WP-EIN, or WT-EIN) and check the appropriate box on the form.

Publicly Traded Partnerships

For 2011, these partnerships had special reporting rules for distributions of effectively connected income to foreign partners, including specific timing rules for when Schedule K-1 was furnished.

Overwithholding Adjustments

If you discovered you withheld too much tax by March 15, 2012, you could repay the recipient and reduce your deposits. After that date, more complex reimbursement or set-off procedures applied.

Step-by-Step Filing Process (High Level)

Step 1: Determine Your Filing Obligation

Review all payments you made to foreign persons during 2011. Did you pay any fixed or determinable annual or periodical (FDAP) income—dividends, interest, rents, royalties, compensation, pensions, or other qualifying income? Did you make any federal procurement payments under contracts for foreign goods or services? If yes to either question, you likely need to file.

Step 2: Obtain Your EIN

You need an Employer Identification Number. If you're a standard withholding agent, use your regular EIN. If you're a QI, WP, or WT, you need a special EIN obtained by submitting Form SS-4 with your status application to: Internal Revenue Service LB&I: International: QI Group, 1031 290 Broadway, 12th floor, New York, NY 10007-1867.

Step 3: Maintain Proper Deposit Records

Throughout 2011, you should have been making timely deposits using EFTPS based on the schedule described above. Keep meticulous records of all deposits in the "Record of Federal Tax Liability" (the monthly breakdown section of Form 1042). This record must match your actual deposit activity—the IRS will compare them.

Step 4: Prepare Forms 1042-S

Before completing Form 1042, create individual Forms 1042-S for each recipient who received reportable income. Each form identifies the recipient, income type, gross income paid, federal tax withheld, and any applicable exemptions or treaty benefits. Remember: if filing 250+ on paper, you must file electronically.

Step 5: Complete Form 1042

Working from your Forms 1042-S and deposit records, complete Form 1042:

• Lines 1-60: Report tax liability for each period throughout 2011 (broken down by quarter-monthly periods matching your deposit schedule)
• Line 61: Enter total number of Forms 1042-S filed
• Lines 62a-62b: Reconcile total gross income and tax withheld from all Forms 1042-S
• Line 63a: Enter total from your Record of Federal Tax Liability
• Lines 64-66: Report deposits made, overpayments from prior year, and credits from other withholding agents
• Line 71: Calculate 2% excise tax on specified federal procurement payments (if applicable)

Step 6: Reconcile and Verify

This is crucial: your Form 1042 amounts must match your Forms 1042-S totals. Line 62b (total tax withheld per Forms 1042-S) should equal line 63c (adjusted total tax liability). Mismatches trigger IRS correspondence and potential audits.

Step 7: File and Transmit

Mail Form 1042 to the Ogden Service Center address by March 15, 2012. If filing Forms 1042-S on paper, use Form 1042-T to transmit them (one Form 1042-T per income type). If filing Forms 1042-S electronically, still mail the paper Form 1042—electronic filing of the main return wasn't mandatory in 2011.

Common Mistakes and How to Avoid Them

Mistake #1: Failing to Reconcile Forms 1042-S with Form 1042

The most frequent error is mismatched totals between individual recipient forms and the main return. Prevention: Before finalizing Form 1042, sum all amounts in box 2 (gross income) from every Form 1042-S—this should equal line 62a. Similarly, sum box 9 (net tax) minus box 10 (tax withheld by other agents) from all Forms 1042-S—this should match line 62b. Use a spreadsheet to track these calculations.

Mistake #2: Duplicate Filing (Electronic and Paper)

Filing the same Forms 1042-S both electronically and on paper creates duplicate records in the IRS system, triggering penalty notices. Prevention: Choose one method and stick with it. If filing electronically, keep careful records but don't also mail paper copies. The FIRE system provides confirmation—wait for successful transmission acknowledgment before considering the filing complete.

Mistake #3: Missing or Incorrect Deposit Timing

Many withholding agents incorrectly calculate when deposits are due, leading to failure-to-deposit penalties. Prevention: Create a calendar marking all quarter-monthly and monthly deadlines. Remember that deposits must be initiated by 8 p.m. ET the day before the due date when using EFTPS. Build in buffer time—don't wait until the last minute.

Mistake #4: Reporting Income on Wrong Lines

The 60 liability lines correspond to specific time periods throughout the year. Some filers incorrectly lump all liability together or report it in the wrong periods. Prevention: Report liability for the period when income was distributed or, for partnerships, when the Schedule K-1 was furnished to foreign partners (or its due date, whichever is earlier). For the new 2011 excise tax, report liability for the period when the procurement payment was made.

Mistake #5: Incorrect Handling of Overwithholding

Withholding agents who discover they withheld too much often incorrectly adjust prior-year returns or fail to follow the proper procedures. Prevention: If you discover overwithholding by March 15, 2012, you can repay the recipient and reduce your 2011 tax liability on the corresponding lines. If you discover it later, use the reimbursement procedure (repay with your own funds by March 15 of the following year) or set-off procedure (reduce future withholding). Never amend a prior-year Form 1042 to recover overwithholding discovered after March 15.

Mistake #6: Forgetting the New Excise Tax

The 2% excise tax on specified federal procurement payments was new in 2011, and many withholding agents missed it. Prevention: Review all payments made under federal procurement contracts entered into after January 1, 2011. If the goods were manufactured or services provided in countries without U.S. international procurement agreements, you owe 2% excise tax. Check the current country list at the Office of the United States Trade Representative website (Government Procurement tab) as referenced in the IRS instructions.

What Happens After You File

Processing Timeline

The IRS processes Form 1042 at the Ogden Service Center. Processing typically takes 6-8 weeks for error-free returns. During this time, the IRS matches your Form 1042 against all associated Forms 1042-S to verify reconciliation.

Refunds or Additional Payments

If line 69 shows an overpayment, you can choose (line 70) to receive a refund or apply the credit to your 2012 withholding tax deposits. Refunds generally arrive 6-12 weeks after processing. If you owe additional tax (line 68), send payment with your return to avoid additional interest charges.

Verification and Correspondence

Expect correspondence if the IRS identifies discrepancies. Common triggers include: mismatched totals between Form 1042 and Forms 1042-S, deposit amounts not matching reported liability, missing Forms 1042-S, or mathematical errors. The IRS will send a notice explaining the issue and requesting correction or additional information. Respond promptly—typically within 30 days—to minimize penalties.

Audit Potential

Form 1042 can be selected for audit, particularly if you report significant treaty benefits, unusual payment patterns, or have a history of filing errors. The IRS has three years from the filing date to audit (longer if substantial errors are found). During an audit, you'll need to provide documentation supporting all reported payments, recipient status, deposit records, and treaty claims.

Penalty Assessment

If penalties apply, the IRS will calculate them and send a notice. You'll see separate assessments for late filing (5% per month), late payment (0.5% per month), failure to deposit (2-15% depending on lateness), and failure to file Forms 1042-S correctly (varies by error type). Interest compounds on all unpaid amounts. You can request penalty abatement if you have reasonable cause—file Form 843 with supporting documentation.

Record Retention

Keep copies of your Form 1042, all Forms 1042-S, deposit records, and supporting documentation for at least three years after the filing due date. In practice, retain them longer if you have ongoing treaty claims or complex international arrangements—seven years is prudent for international tax records.

FAQs

Q1: I made payments to foreign persons but didn't withhold anything because of a tax treaty. Do I still need to file Form 1042?

Yes. Form 1042 is required whenever you're responsible for filing Forms 1042-S, regardless of whether tax was actually withheld. Treaty-exempt payments still must be reported—you'll show zero withholding but must document the payment and treaty claim. The IRS uses this information to verify that treaty benefits were properly claimed and to share information with treaty partner countries.

Q2: What's the difference between Form 1042, Form 1042-S, and Form 1042-T?

Form 1042 is your annual return summarizing total withholding tax liability—think of it as the cover page. Form 1042-S provides individual recipient details (similar to how a W-2 reports to each employee)—you file one for each foreign person/entity who received income. Form 1042-T is simply a transmittal form to send paper Forms 1042-S to the IRS—it's like a packing slip listing what you're mailing. If filing Forms 1042-S electronically, you don't need Form 1042-T.

Q3: I'm both a QI for some accounts and a regular withholding agent for others. How do I file?

File separate Forms 1042—one for your QI capacity and another for your non-QI capacity. Each form should have the appropriate EIN (QI-EIN for qualified intermediary activities, regular EIN for standard withholding) and the correct checkbox marked. Keep the activities completely segregated to avoid confusion. The same principle applies if you're acting as a withholding foreign partnership or trust for some payments.

Q4: What if I discover I overwithheld tax after March 15, 2012?

You have two options: the reimbursement procedure or set-off procedure. For reimbursement, repay the beneficial owner with your own funds by March 15, 2013. Keep a receipt showing the date and amount, and provide a copy to the recipient. You can then reduce your 2012 deposits by the amount repaid. For set-off, reduce future withholding on payments to the same person before the earlier of when you file their 2011 Form 1042-S or March 15, 2013. Do not amend the 2011 Form 1042—report the adjustment on your 2012 return instead.

Q5: My deposit for one quarter-monthly period was late. How is the failure-to-deposit penalty calculated?

The penalty ranges from 2% to 15% of the undeposited amount, depending on how late you were: 2% if deposited 1-5 days late, 5% if 6-15 days late, 10% if 16+ days late or within 10 days of receiving an IRS notice, and 15% if still unpaid more than 10 days after the notice. The IRS calculates this automatically—you don't self-assess it on Form 1042 for 2011 (the self-assessment line was deleted that year). If you have reasonable cause for the late deposit, request penalty abatement in writing.

Q6: Can I file Form 1042 electronically?

For 2011, electronic filing of Form 1042 itself was not mandatory—you mailed it to Ogden even if you filed Forms 1042-S electronically. Only the Forms 1042-S had an electronic filing requirement (if 250+). However, the IRS encouraged electronic filing of Forms 1042-S regardless of volume. Note that in later years, electronic filing requirements expanded significantly, but for 2011, paper filing of Form 1042 was the standard procedure.

Q7: I paid bank deposit interest to foreign persons. Do I need to report this?

Generally, no—U.S.-source bank deposit interest paid to foreign persons is usually not subject to withholding or reporting, provided it's not effectively connected with a U.S. trade or business. However, there's an important exception: if you paid $10 or more in bank deposit interest to Canadian residents (who are not U.S. citizens), you must report it on Form 1042-S using income code 29 and exemption code 02. Include an information contact phone number on the recipient's copy and a statement that the information is being provided to both the IRS and may be shared with the Canadian government.

For More Information: All forms, instructions, and Publication 515 (Withholding of Tax on Nonresident Aliens and Foreign Entities) are available at IRS.gov. For tax law questions, call 267-941-1000 (not toll-free), weekdays 6:00 a.m. to 11:00 p.m. Eastern time, or write to: Internal Revenue Service, International Section, Philadelphia, PA 19255-0725.

This guide is based on the official 2011 Instructions for Form 1042, 2011 Form 1042, and 2011 Instructions for Form 1042-S published by the Internal Revenue Service.