Form 1042-S: Foreign Person's U.S. Source Income Subject to Withholding (2016)
When businesses or individuals in the United States pay income to foreign persons—whether they're international students receiving scholarships, foreign contractors earning fees, or overseas investors collecting dividends—they typically need to report those payments to the IRS using Form 1042-S. This form serves as a paper trail showing what U.S.-source income was paid to foreign recipients and whether any U.S. taxes were withheld from those payments. Think of it as similar to the Form 1099 or W-2 you might receive for domestic income, but specifically designed for payments crossing international borders. IRS.gov
What Form 1042-S Is For
Form 1042-S is an information return that must be filed by "withholding agents"—essentially anyone who pays U.S.-source income to foreign persons. The term "withholding agent" is broader than you might think: it includes U.S. and foreign corporations, partnerships, trusts, financial institutions, intermediaries, and even individuals making certain payments. If you control or disburse payments of U.S.-source income to someone who isn't a U.S. citizen or resident, you're likely a withholding agent.
The form reports "fixed or determinable annual or periodical" (FDAP) income from U.S. sources, a category that includes interest, dividends, rents, royalties, salaries, wages (when claiming treaty benefits), compensation for services, annuities, pensions, gambling winnings, scholarships, fellowship grants, insurance premiums, and various other payment types. Even if no tax was actually withheld—perhaps because a tax treaty reduced the rate to zero or the income qualified for an exemption—you still must file the form. The IRS uses Form 1042-S to track cross-border payments, verify treaty claims, and ensure proper tax compliance. IRS Instructions 2016
Common scenarios requiring Form 1042-S include: a U.S. university paying stipends to a foreign graduate student; a U.S. company paying royalties to a foreign software developer; a brokerage paying dividends to a nonresident alien investor; a publicly traded partnership distributing income to foreign partners; or the federal government making procurement payments to foreign contractors under section 5000C.
When You’d Use Form 1042-S
Including Late and Amended Filings
For the 2016 tax year, Form 1042-S must be filed with the IRS and furnished to the income recipient by March 15, 2017.
This deadline applies whether you're filing on paper or electronically. You must file a separate form for each foreign recipient and for each type of income paid (as identified by income codes).
Extensions
If you need more time, you can request an automatic 30-day extension by filing Form 8809 (Application for Extension of Time To File Information Returns) before the March 15 deadline. If you need even more time, you may submit a second Form 8809 before the first extension period expires. The IRS encourages you to request extensions as soon as you know you'll need one, but extensions must be requested no later than the original due date. IRS Instructions 2016
Amended Returns
Discovered an error after filing? You must correct it as soon as possible by filing an amended Form 1042-S. On a paper form, check the "Amended" box at the top and enter all the correct information—don't just show the changes. Include the corrected form with a Form 1042-T transmittal and send it to the IRS. You must also provide corrected recipient copies (Copies B, C, and D) promptly. If you're filing electronically, follow the procedures outlined in IRS Publication 1187. If your corrections affect your annual summary (Form 1042), you'll need to amend that form as well. Failing to correct errors can result in penalties, so don't delay once you spot a mistake. IRS Instructions 2016
Key Rules or Details for 2016
Several important changes took effect for 2016 filings:
Electronic Filing Requirements
Financial institutions (whether U.S. or foreign) must file Form 1042-S electronically, regardless of how many forms they have. Non-financial-institution filers with 250 or more forms must also file electronically via the IRS FIRE (Filing Information Returns Electronically) system. Paper filing is allowed only for non-financial institutions filing fewer than 250 forms. However, the IRS encourages everyone to file electronically even if not required.
Account-by-Account Reporting
Starting with 2016 payments, U.S. financial institutions and U.S. branches of foreign financial institutions must report payments of the same income type made to the same recipient's multiple accounts on separate Forms 1042-S—one per account. This new requirement increases reporting precision but also means more forms to file.
New Status Codes and Boxes
For 2016, withholding agents must provide both Chapter 3 and Chapter 4 (FATCA) status codes regardless of payment type. New codes were added for foreign branches of U.S. financial institutions. Additionally, if you're claiming a treaty-reduced withholding rate for an entity recipient, you must include a "limitation on benefits" (LOB) code in box 13j, though you're not required to obtain new documentation unless it's time to renew anyway.
Substitute Forms
If you create your own version of Form 1042-S to give to recipients (Copies B, C, or D), it must exactly match the format and information on the copy you filed with the IRS. Starting in 2015, you can no longer combine different payment types on a single substitute form—each income code requires a separate form. This change helps prevent confusion and processing errors. IRS Instructions 2016
Country Codes
The IRS removed the country code list from the printed instructions for 2016. You must now use the current country code list available at IRS.gov to ensure accuracy.
Step-by-Step (High Level)
Step 1: Determine If You're a Withholding Agent
Ask yourself: Did I pay U.S.-source income to a foreign person during 2016? Do I have control over or custody of those payments? If yes, you're likely a withholding agent required to file Form 1042-S.
Step 2: Collect Documentation
Gather the required withholding documentation from your recipients—typically Form W-8 series (W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, or W-8IMY) or Form 8233. These forms provide the recipient's status, taxpayer identification number (TIN), country of residence, and any treaty claims.
Step 3: Calculate Gross Income and Withholding
Determine the total U.S.-source gross income paid to each recipient and calculate any tax withheld. Even if you withheld zero tax due to a treaty or exemption, you still need these figures. Remember: all amounts must be reported in U.S. dollars, rounded to the nearest whole dollar.
Step 4: Complete Form 1042-S
Fill out a separate form for each recipient and each income type. Key boxes include: Box 1 (income code), Box 2 (gross income), Box 7 (federal tax withheld), Box 12 (withholding agent information—name, TIN, status codes), and Box 13 (recipient information—name, country code, address, TIN if available, status codes). Be precise: the income code must accurately reflect the payment type, and country codes must be valid.
Step 5: File With the IRS and Furnish Copies to Recipients
If filing electronically (required for financial institutions or if you have 250+ forms), submit through the FIRE system at fire.irs.gov. If filing on paper, attach Copy A of each Form 1042-S to Form 1042-T (the transmittal form) and mail to the address in the Form 1042-T instructions. Provide Copies B, C, and D to each recipient by March 15, 2017. Retain Copy E for your records.
Step 6: File Form 1042 (Annual Summary)
Don't forget: if you file Form 1042-S, you also must file Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons), which summarizes all the payments and withholding reported on your Forms 1042-S. IRS Instructions 2016
Common Mistakes and How to Avoid Them
The IRS has identified recurring errors that cause processing delays, rejections, and penalties:
Using Blended or Invalid Tax Rates
Only use withholding rates specifically authorized by statute, regulations, or tax treaty. Don't average or "blend" rates. If different rates apply to different portions of a payment, file separate Forms 1042-S for each rate.
Leaving Required Fields Blank
At minimum, you must complete boxes 1, 2, 7, 12a, 12d, 12f (unless the withholding agent is a U.S. person), 12h-i, and 13a. Additional boxes are required depending on the payment type—for example, if reporting a withholdable payment under Chapter 4, you must also complete boxes 4a, 4b, 12b, 12c, and 13g.
Reporting Zero Gross Income
Box 2 (gross income) can never be zero. If there was no payment, don't file a form.
Mismatched Income Codes
The income code in Box 1 must accurately describe the payment. Using the wrong code can mischaracterize the income and lead to incorrect tax treatment.
Incorrect or Missing Country Codes
Recipient and intermediary country codes are mandatory and must be accurate. Don't use "US" for foreign recipients (except in very specific circumstances involving U.S. branches). If claiming a tax treaty exemption (exemption code 04), the country code in Box 13e must match a valid U.S. treaty country.
Listing Multiple Recipients
Form 1042-S can only report one recipient per form. If you have joint owners, list only one as the recipient and file separate forms if necessary.
Inconsistent Copies
The form filed with the IRS (Copy A) must exactly match the copies given to recipients. Any discrepancies will delay the recipient's tax return processing and may result in disallowed refund claims.
Failing to Round to Whole Dollars
All monetary amounts must be in U.S. dollars rounded to the nearest whole dollar (amounts under 50 cents round down; 50 cents and above round up).
Not Reading the Instructions
Many filers skip IRS Publication 515 (Withholding of Tax on Nonresident Aliens and Foreign Entities) and the Form 1042-S instructions, leading to avoidable mistakes. These resources explain complex withholding rules and proper form completion. IRS Instructions 2016
What Happens After You File
Once you file Form 1042-S with the IRS and provide copies to recipients, several things occur:
IRS Processing
The IRS uses the information to verify that foreign recipients properly report their U.S.-source income on their tax returns (typically Form 1040-NR for nonresident individuals). The IRS also cross-checks whether withholding agents deposited and remitted the correct amounts of withheld taxes via Form 1042.
Recipient Use
Foreign persons use the Form 1042-S they receive to prepare their U.S. tax returns, claim refunds of over-withheld taxes, or verify that treaty benefits were properly applied. The form is also evidence of U.S. taxes paid, which may generate foreign tax credits in their home countries.
Record Retention
As a withholding agent, you must retain copies of all filed Forms 1042-S (or be able to reconstruct the data) for at least three years after the reporting due date. This allows you to respond to IRS inquiries or audits.
Potential Notices or Penalties
If you filed late, omitted required information, or made errors, the IRS may issue penalty notices. However, penalties can be waived if you show reasonable cause and correct mistakes promptly. If electronic filing was required and you filed on paper without an approved waiver, you may face additional penalties.
Refunds and Adjustments
If a recipient discovers their Form 1042-S contains errors affecting their tax liability or refund, they may request you file an amended form. Correcting these issues quickly helps avoid disputes and ensures recipients get accurate tax treatment. IRS Instructions 2016
FAQs
1. What if the foreign person doesn't have a U.S. Taxpayer Identification Number (TIN)?
You should request a TIN, but if the recipient cannot obtain one, you can still file Form 1042-S. Leave the TIN box blank and use the recipient's foreign tax identification number if available, or report without a TIN. Be aware that lack of a TIN may trigger higher withholding rates and complicate the recipient's ability to claim refunds or treaty benefits.
2. Do I need to file Form 1042-S if I withheld zero tax due to a treaty?
Yes. Even if no tax was withheld because a tax treaty eliminated or reduced the withholding rate, you must still file Form 1042-S to report the payment and document the treaty claim. This allows the IRS to monitor treaty compliance.
3. Can I file one Form 1042-S covering multiple payments to the same recipient?
You can combine payments of the same income type (same income code) to the same recipient on one form, as long as they have the same withholding rate and Chapter 4 exemption code. However, different income types require separate forms. Additionally, for 2016 and later, financial institutions must file separate forms for each account, even if the recipient and income type are the same.
4. What happens if I miss the March 15 deadline?
You'll face escalating penalties based on how late you file: $50 per form if filed within 30 days, $100 per form if filed by August 1, and $260 per form (or more) if filed after August 1. The same penalties apply for failing to furnish forms to recipients. File as soon as you realize you're late to minimize penalties. You may avoid penalties if you can demonstrate reasonable cause.
5. How do I correct a Form 1042-S that I already filed?
Prepare a corrected form with all the accurate information, check the "Amended" box, and file it with the IRS along with Form 1042-T (for paper filings) or through the FIRE system (for electronic filers). Also provide corrected copies to the recipient immediately. If the correction affects your Form 1042, amend that as well.
6. Are payments to international organizations or foreign governments reportable?
Yes, payments to foreign governments, foreign central banks, and international organizations must be reported on Form 1042-S, even though these entities may be exempt from U.S. tax under treaties or the Internal Revenue Code.
7. What's the difference between Chapter 3 and Chapter 4 reporting?
Chapter 3 refers to traditional withholding on payments to foreign persons (sections 1441–1443 of the tax code). Chapter 4 refers to FATCA (Foreign Account Tax Compliance Act) withholding, which targets payments to foreign financial institutions and certain entities that don't comply with information-sharing requirements. For 2016, you must report both Chapter 3 and Chapter 4 status codes on Form 1042-S, and certain payments require additional information like GIINs (Global Intermediary Identification Numbers) and account numbers. IRS Instructions 2016
Additional Resources
- IRS Form 1042-S Information Page
- 2016 Form 1042-S Instructions (PDF)
- IRS Publication 515: Withholding of Tax on Nonresident Aliens and Foreign Entities
- IRS Publication 1187: Electronic Filing Specifications
