Form 1042-S: Foreign Person's U.S. Source Income Subject to Withholding (2010)
If you're a business, financial institution, or individual who pays certain types of income to foreign persons, you may need to file Form 1042-S. This guide breaks down everything you need to know about the 2010 version of this form in plain English, based on official guidance from the Internal Revenue Service.
What Form 1042-S Is For
Form 1042-S is an information return used to report income paid to foreign persons from U.S. sources that is subject to tax withholding. Think of it as the international cousin of Form 1099—but instead of reporting payments to U.S. residents, it tracks money paid to non-U.S. citizens, foreign corporations, partnerships, trusts, and estates.
The form serves two key purposes: first, it documents the gross income paid to foreign recipients, and second, it reports any U.S. taxes withheld from those payments. Even if no tax was actually withheld—because the income was exempt under a tax treaty or Internal Revenue Code exception—you still must file the form in most cases.
Common types of income reported on Form 1042-S include interest, dividends, rents, royalties, scholarships, gambling winnings, compensation for services performed in the U.S., pension distributions, and Real Estate Investment Trust (REIT) distributions. The form also covers more specialized payments like substitute dividends from securities lending transactions and distributions from publicly traded partnerships.
Withholding agents—individuals or entities that control, receive, or disburse payments to foreign persons—are responsible for filing this form. These agents can include U.S. banks, brokerage firms, employers, universities paying foreign scholars, casinos, and any person or business making payments to foreign recipients. IRS.gov
When You’d Use Form 1042-S
Due Dates, Late Filing, and Amended Filings
Standard Due Date
For the 2010 tax year, Form 1042-S had to be filed by March 15, 2011. This deadline applied both to submitting Copy A to the Internal Revenue Service and furnishing Copies B, C, and D to the income recipient. One important exception: if you made substitute dividend payments after September 13, 2010, you received an automatic six-month extension, with a due date of the earlier of September 15, 2011, or whenever you provided the form to the recipient.
Late Filing
Late filings occur when you miss the March 15 deadline. If you realize you need to file after this date has passed, submit the forms as soon as possible. The IRS imposes penalties for late filing, though penalties may be reduced if you file amended returns by August 1 following the original due date.
Amended Returns
Amended returns become necessary when you discover errors on forms already filed—such as incorrect recipient information, wrong income amounts, miscalculated withholding, or improper income or exemption codes. To file an amended Form 1042-S, check the “AMENDED” box at the top of the form and complete all boxes with the correct information, not just the fields being corrected. Remember that the 250-or-more electronic filing requirement applies separately to both original and amended returns. IRS.gov
Extensions
If you need more time to file, you can request an extension using Form 8809, which grants an automatic 30-day extension. A second Form 8809 can be filed if additional time is needed. However, if you’re requesting extensions for more than 10 recipients, you must submit these requests electronically.
Key Rules or Details for 2010
Electronic Filing Threshold
If you had 250 or more Forms 1042-S to file, electronic submission through the FIRE (Filing Information Returns Electronically) system was mandatory. This requirement applied separately to original and amended returns.
New Reporting Requirements
The 2010 form year introduced several updates. New income codes were added for expatriate withholding (codes 38 and 39) to report payments to former U.S. citizens or long-term residents who renounced citizenship or residence after June 16, 2008. Additionally, new rules applied to dividend equivalent payments made after September 13, 2010, requiring the use of income code 40 for certain payments.
Qualified Securities Lenders (QSLs)
A new category of recipients—qualified securities lenders (QSLs)—was introduced, with special exemptions from withholding on substitute dividend payments under certain conditions.
Mandatory Companion Filing
You must also file Form 1042 (Annual Withholding Tax Return) if you’re required to file Form 1042-S. These forms work together—Form 1042 reports the total tax liability, while Form 1042-S provides the recipient-by-recipient breakdown.
Use Form 1042-T for Paper Filing
When submitting paper Forms 1042-S, you must use Form 1042-T (Annual Summary and Transmittal) to transmit them to the IRS. Use separate Forms 1042-T for each type of Form 1042-S.
Step-by-Step (High Level)
Step 1: Gather Documentation
Collect all withholding certificates (Forms W-8BEN, W-8ECI, W-8EXP, W-8IMY) from foreign recipients and verify their taxpayer identification numbers and country of residence.
Step 2: Calculate Amounts
Determine the gross income paid, any withholding allowances, net income, applicable tax rate, and amount withheld for each recipient and payment type.
Step 3: Determine Codes
Select the correct income code (Box 1), exemption code if applicable (Box 6), and recipient code (Box 13b) from the official code lists in the form instructions.
Step 4: Complete the Form
Fill out a separate Form 1042-S for each recipient and income type. Paper filers cannot report multiple income types on Copy A sent to the IRS, though recipient copies (B, C, D) may combine income types.
Step 5: Choose Filing Method
If filing fewer than 250 forms, submit paper copies with Form 1042-T to the address listed in the Form 1042-T instructions. If filing 250 or more, use the FIRE system for electronic submission at http://fire.irs.gov.
Step 6: Distribute Copies
Provide Copies B, C, and D to the income recipient by March 15. Retain Copy E for your records (at least 3 years after the reporting due date).
Step 7: File Form 1042
Complete and file the companion Form 1042 to report aggregate withholding tax liability and make any required tax deposits.
Common Mistakes and How to Avoid Them
Mistake #1: Confusing Forms 1042-S and 1099
Form 1042-S is for foreign persons only. U.S. citizens and residents receiving the same types of payments should receive Form 1099, not 1042-S. Always verify recipient status before selecting the form.
Mistake #2: Failing to File When No Tax Was Withheld
Many filers mistakenly believe Form 1042-S is only required when taxes are actually withheld. In fact, you must file even if the payment was tax-exempt due to a treaty benefit or Code exception, with limited exceptions.
Mistake #3: Using Incorrect Income or Exemption Codes
Selecting the wrong code can cause processing delays and penalties. Carefully review the code tables—for example, using income code 01 (general interest) when 29 (bank deposit interest) is appropriate, or forgetting to enter exemption code 04 when claiming treaty benefits.
Mistake #4: Missing the Electronic Filing Requirement
If you have 250 or more forms, paper filing is not just discouraged—it’s prohibited. Ignoring the electronic filing mandate results in penalties. Track your form count throughout the year.
Mistake #5: Incomplete Recipient Information
Missing or incorrect taxpayer identification numbers, addresses, or country codes cause rejections. Verify all information against recipient withholding certificates before filing.
Mistake #6: Not Retaining Documentation
Keep copies of all filed forms and supporting documentation for at least three years after the reporting due date, as the IRS may audit withholding agent compliance.
What Happens After You File
For Electronic Filers
Check the FIRE system status within five business days to verify successful transmission. The IRS will not mail error reports for failed files—it’s your responsibility to monitor submission status.
For the Recipient
The foreign person uses the information on Form 1042-S to complete their U.S. tax return (typically Form 1040NR for individuals or Form 1120-F for corporations). If sufficient tax was withheld to cover their entire U.S. tax liability, they may not need to file a return. However, if they want to claim a refund of over-withheld taxes or have effectively connected income, a return is required.
For the IRS
The information on Form 1042-S helps the IRS track income paid to foreign persons and verify compliance with withholding requirements. The IRS matches Forms 1042-S against Forms 1042 to ensure reported withholding equals taxes deposited.
Penalties
Late or incorrect filing can result in penalties. The penalty structure for 2010 was $50 per form if filed within 30 days of the deadline, with maximum annual penalties of $100,000. Intentional disregard of filing requirements carries significantly higher penalties.
Audits and Inquiries
The IRS may contact you to resolve discrepancies. Maintain good records to respond quickly to any inquiries. The withholding agent remains liable for any tax that should have been withheld but wasn’t.
FAQs
Q1: What's the difference between a withholding agent and a payer?
A withholding agent is any person who controls, receives, or disburses income subject to withholding—essentially, anyone who has the ability to withhold. A payer is the person for whom the withholding agent acts pursuant to a paying agreement. In many cases, the payer and withholding agent are the same entity.
Q2: Can I use a substitute form instead of the official Form 1042-S?
Yes, but your substitute form must meet IRS specifications detailed in Publication 1179. The official Form 1042-S is the standard—any variation must be carefully designed to meet requirements before use. Always verify your substitute form complies with the year’s specifications.
Q3: What if the foreign person provides incorrect information on their Form W-8?
You must apply the presumption rules to determine the recipient’s status and applicable withholding rate. For example, if a recipient fails to provide documentation, you may need to presume they are a U.S. person subject to backup withholding, or a foreign person subject to 30% withholding, depending on the circumstances.
Q4: Do I need to file Form 1042-S for payments to Canadian residents?
It depends on the income type. Bank deposit interest paid to Canadian residents (who aren’t U.S. citizens) must be reported using income code 29 and exemption code 02. However, many other types of income may be treaty-exempt. Always consult the U.S.-Canada tax treaty provisions.
Q5: How do I correct an error on a Form 1042-S after the recipient has already filed their tax return?
File an amended Form 1042-S immediately by checking the “AMENDED” box and providing all corrected information. Send corrected copies to the recipient so they can file an amended U.S. tax return (Form 1040NR-X or 1120-F amended) if necessary.
Q6: What if I discover I should have filed Form 1042-S but didn't?
File the missing forms as soon as you discover the error, even if it’s past the due date. Include a statement explaining the reason for the delay. The IRS may reduce penalties for reasonable cause, especially if you voluntarily correct the oversight.
Q7: Where can I get help if I have tax law questions about withholding?
The IRS Information Reporting Program (866-455-7438) can help with technical filing issues but not tax law questions. For withholding tax law guidance, call 215-516-2000 or write to: Internal Revenue Service, International Section, P.O. Box 920, Bensalem, PA 19020-8518.
Additional Resources
- IRS Form 1042-S and Instructions
- IRS Publication 515: Withholding of Tax on Nonresident Aliens and Foreign Entities
- IRS Publication 1187: Electronic Filing Specifications (2010)
Note: This guide covers 2010 tax year requirements. Tax laws change frequently. Always consult current IRS publications and consider professional tax advice for your specific situation.
