Form 1042: Annual Withholding Tax Return for U.S. Source Income of Foreign Persons (2015)

Form 1042 is the annual tax return that U.S. withholding agents must file to report federal income tax withheld from payments made to foreign persons. Think of it as the “master summary” form that reports all the withholding tax you collected from foreign individuals and entities who received U.S. source income during the 2015 calendar year.

In simple terms, when you pay money to someone who isn’t a U.S. citizen or resident—such as a foreign consultant, a nonresident alien employee, or a foreign corporation—you’re typically required to withhold a portion of that payment for taxes and send it to the IRS. Form 1042 is how you report those withheld amounts annually.

The form covers tax withheld under Chapter 3 of the Internal Revenue Code (traditional withholding on foreign persons) and Chapter 4 (FATCA withholding introduced in recent years). Starting in 2015, the form also includes reporting for specified federal procurement payments under section 5000C—an excise tax on certain federal contractors from countries without international procurement agreements with the U.S.

Who Must File

You must file Form 1042 if you’re a withholding agent—which can be any individual, corporation, partnership, trust, estate, association, or even a government agency that controls or pays U.S. source income to foreign persons. This includes qualified intermediaries (QIs), withholding foreign partnerships (WPs), withholding foreign trusts (WTs), and foreign financial institutions participating under FATCA.

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

Standard Filing Deadline

Form 1042 for the 2015 tax year must be filed by March 15, 2016. The form should be mailed to:

Internal Revenue Service Ogden Service Center P.O. Box 409101 Ogden, UT 84409

Need More Time?

You can request an automatic extension by filing Form 7004 (Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns) before the March 15 deadline. However, this extension only gives you more time to file the paperwork—not more time to pay any taxes owed.

You must still pay the full amount by March 15, 2016, to avoid penalties and interest.

Filing an Amended Return

If you discover errors on a previously filed Form 1042, you must correct them promptly. Check the “amended return” box at the top of the form and submit the corrected version. Common reasons for amendments include:

Discovering underwithheld or overwithheld tax
Incorrect withholding agent information
Mistakes in your tax liability calculations

The sooner you file an amendment, the better—delays can result in penalties and interest charges.

Late Filing

If you miss the March 15 deadline without an extension, file as soon as possible. The IRS will assess penalties, but filing late is always better than not filing at all.

Key Rules and Changes for 2015

Chapter 3 and 4 Status Codes Now Required

As of 2015, all withholding agents must enter their Chapter 3 and Chapter 4 status codes on the form. These codes identify your role (e.g., qualified intermediary, participating FFI, nonqualified intermediary).

Section 2 Now Mandatory

In 2015, Section 2 (Reconciliation of U.S. Source FDAP Income) became mandatory for all withholding agents—it was optional in prior years.

FATCA Reporting

The 2015 form includes comprehensive reporting for the Foreign Account Tax Compliance Act (FATCA/Chapter 4). If you’re a foreign financial institution (FFI) or make withholdable payments, you must report both Chapter 3 and Chapter 4 withholding on the same consolidated Form 1042.

Electronic Filing Requirement

If you file 250 or more Forms 1042-S, or if you’re a financial institution, you must file electronically. Paper filing is only allowed for smaller filers.

Deposit Requirements

All tax deposits must be made using the Electronic Federal Tax Payment System (EFTPS). You cannot mail checks directly to the IRS for deposits—doing so will result in penalties.

Step-by-Step Filing Process (High Level)

Step 1: Gather Your Documentation

Collect all Forms 1042-S you’ve prepared for each foreign recipient. Form 1042-S reports the specific amounts paid and taxes withheld for individual payees. Form 1042 is the summary of all these forms.

Step 2: Complete Section 1 (Record of Federal Tax Liability)

Lines 1–60 break down your monthly tax liability by quarter-monthly periods. Enter the total tax you were liable to withhold during each period—not when you deposited it. This section must reconcile with your actual EFTPS deposits made throughout the year.

Step 3: Complete Section 2 (Reconciliation of U.S. Source FDAP Income)

This mandatory section reconciles all FDAP income subject to Chapter 4 reporting. Report both income requiring and not requiring withholding.

Step 4: Report Gross Amounts and Tax Withheld

Enter totals from all Forms 1042-S, including gross amounts and tax withheld or paid. Ensure these match across all filed forms.

Step 5: Calculate Your Total Net Tax Liability

Use lines 64a–64e to determine your total net tax liability under Chapters 3 and 4, including any excise tax on federal procurement payments.

Step 6: Report Payments and Determine Balance Due or Overpayment

List your total EFTPS deposits, credits from 2014, and other withholding credits. Identify whether you have a balance due or an overpayment.

Step 7: Sign, Date, and Mail

The form must be signed under penalties of perjury by someone authorized to sign on behalf of the withholding agent.

Common Mistakes and How to Avoid Them

Mistake #1: Missing or Incorrect Status Codes

Mistake #2: Reconciliation Errors

Mistake #3: Not Filing Section 2

Mistake #4: Late or Missing EFTPS Deposits

Mistake #5: Confusing Form 1042-S with Form 1042

Mistake #6: Using Mailed Checks for Deposits

Mistake #7: Forgetting About Overwithholding Adjustments

Each of these errors can result in IRS notices, penalties, or delays. Always review your form against the official 2015 instructions before submission.

What Happens After You File

Processing Time

The IRS typically processes Form 1042 within several months.

Refunds and Credits

If you have an overpayment, you can request a refund or apply it to your next year’s Form 1042.

IRS Correspondence

If the IRS finds discrepancies, you’ll receive a notice requesting clarification or assessing penalties.

Penalties and Interest

Late filing penalties: 5% per month (up to 25%)
Late payment penalties: 0.5% per month (up to 25%)
Interest accrues daily on unpaid balances

Recordkeeping

Keep all related documentation for at least three years, including Forms 1042, 1042-S, EFTPS receipts, and overwithholding records.

FAQs

Q1: I'm a small business that occasionally pays foreign contractors. Do I really need to file Form 1042?

Yes. If you made any payments to foreign persons subject to withholding during 2015, you must file Form 1042 and 1042-S, regardless of business size.

Q2: Can I file Form 1042 electronically?

Yes. It’s required if you file 250 or more Forms 1042-S or if you’re a financial institution.

Q3: What's the difference between Chapter 3 and Chapter 4 withholding?

Chapter 3 covers traditional withholding on foreign persons; Chapter 4 refers to FATCA withholding for foreign financial institutions and certain noncompliant entities.

Q4: I overwithheld tax from a payment. What should I do?

If discovered before March 15, 2016, you can use undeposited tax to adjust or reimburse the recipient. Report on line 59 as instructed.

Q5: Do I need to report payments to Canadian or Mexican residents differently?

No. However, you may apply reduced treaty rates if the recipient provides proper documentation (Form W-8BEN).

Q6: What if I have no tax liability but made reportable payments?

You still must file Form 1042 if you filed any 1042-S forms, even if no tax was withheld.

Q7: I forgot to file Form 1042 for 2015. What should I do now?

File immediately. Include payment for taxes owed plus estimated penalties and interest, or let the IRS calculate them.

For More Information

Visit IRS.gov/form1042 for current forms, instructions, and guidance.

For assistance completing Form 1042, contact the IRS International Section:

Internal Revenue Service International Section Philadelphia, PA 19255-0725 Phone: 267-941-1000 (not toll-free)