Form 1042-S: Foreign Person's U.S. Source Income Subject to Withholding (2018)

What Form 1042-S Is For

Form 1042-S is an information return that reports payments made to foreign persons (non-U.S. citizens and entities) from U.S. sources. Think of it as the international equivalent of the familiar Form 1099 that reports income to U.S. residents—but with more complexity because it involves cross-border payments and withholding taxes.

Withholding agents—U.S. companies, universities, financial institutions, or other entities that pay foreign persons—must file this form to report various types of income including scholarships, royalties, dividends, interest, compensation for services, and pension payments. The form also reports how much federal tax was withheld from these payments, typically at rates ranging from 0% to 30%, depending on tax treaties and the type of income involved.

The 2018 version incorporated reporting requirements under both Chapter 3 (traditional withholding rules) and Chapter 4 (FATCA—Foreign Account Tax Compliance Act) provisions, making it essential for tracking both income payments and compliance with international tax transparency initiatives. IRS Form 1042-S Instructions, 2018

When You’d Use It (Including Late and Amended Filings)

Standard Filing Timeline

For the 2018 tax year, Form 1042-S must be filed with the IRS and provided to recipients by March 15, 2019. This deadline applies whether you file electronically or on paper. Financial institutions and entities filing 250 or more forms are required to file electronically through the IRS FIRE (Filing Information Returns Electronically) system.

Extension Requests

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 additional time, you may submit a second Form 8809 before the first extension expires, granting another 30 days. For recipient copy extensions, send a written request to the IRS Information Returns Branch in Kearneysville, West Virginia. IRS Instructions 2018

Amended Returns

If you discover an error after filing—whether it's an incorrect income amount, wrong tax rate, missing recipient information, or incorrect withholding agent details—you must file an amended Form 1042-S as soon as possible. The amended form must use the same unique 10-digit identifier as the original and indicate the amendment number (starting with "1" for the first amendment and increasing sequentially for additional amendments). Critically, you must provide amended copies to both the IRS and the recipient, and if the amendment affects your Form 1042 (Annual Withholding Tax Return), you must also file an amended Form 1042.

Key Rules and Requirements for 2018

Withholding Rate Changes

The 2018 tax year brought significant changes to withholding rates due to tax reform. For publicly traded partnerships distributing effectively connected income, the withholding rate changed to 21% for corporate partners and 37% for all other partners (down from previous rates). Similarly, distributions from Qualified Investment Entities treated as gains from U.S. real property interests changed to a 21% withholding rate.

Electronic Filing Threshold

Financial institutions of any size must file electronically, as must any withholding agent filing 250 or more forms. The 250-form threshold applies separately to original and amended returns—meaning if you file 300 original forms but only amend 150, the amended forms can be filed on paper.

Unique Identifiers Required

Every Form 1042-S filed in 2018 and beyond must include a unique 10-digit numeric identifier. This number tracks each form throughout its lifecycle, including any amendments. The identifier cannot be the recipient's tax identification number and must be unique to each form filed for the current year (though you can reuse the same number in subsequent years).

Account-by-Account Reporting

U.S. financial institutions and U.S. branches of foreign financial institutions must report payments to the same recipient across multiple accounts on separate Forms 1042-S—one for each account—when the payments are of the same income type. This requirement, which began in 2016, continued through 2018.

Chapter Indicator

Forms must specify whether they're reporting under Chapter 3 (traditional withholding rules) or Chapter 4 (FATCA) requirements by entering "3" or "4" in Box 3. Both chapter 3 and chapter 4 status codes must be reported regardless of payment type. IRS Instructions 2018

Step-by-Step (High Level)

Step 1: Determine Your Withholding Agent Status

Identify whether you're a U.S. withholding agent, qualified intermediary (QI), withholding foreign partnership (WP), or other entity type. This determines your reporting obligations and which boxes you'll complete on the form.

Step 2: Gather Recipient Documentation

Collect valid withholding certificates from foreign recipients—typically Form W-8BEN (for individuals) or W-8BEN-E (for entities). Verify the recipient's foreign tax identification numbers (FTIN), country of residence, and treaty eligibility if claiming reduced withholding rates.

Step 3: Calculate and Document Payments

Compile records of all U.S.-source payments made to each foreign person during the calendar year. Group payments by income type (using IRS income codes) and determine the applicable withholding rate based on tax treaties, exemptions, or standard 30% withholding.

Step 4: Assign Unique Identifiers

Create a unique 10-digit numeric identifier for each Form 1042-S you'll file. Maintain a tracking system so amended forms can reference the correct original identifier.

Step 5: Complete the Form

Fill in all required boxes including recipient information (name, address, country code, tax ID), income details (income code, gross income amount), withholding information (tax rate applied, amounts withheld), and withholding agent information. Leave "Unknown Recipient" in Box 13a only if you truly cannot identify the recipient despite reasonable efforts.

Step 6: File with IRS and Provide Recipient Copies

Submit Copy A electronically via the FIRE system (if required) or mail paper forms with Form 1042-T (transmittal form) to the IRS. Provide Copies B, C, and D to recipients by the March 15 deadline, and retain Copy E for your records. IRS Instructions 2018

Common Mistakes and How to Avoid Them

Mistake 1: Reporting "Unknown Recipient"

IRS data shows a significant number of Forms 1042-S list "Unknown Recipient" in the recipient name field. This occurs when withholding agents fail to obtain proper documentation from foreign payees. To avoid this, implement robust documentation collection procedures and follow up with recipients who haven't provided W-8 forms well before year-end.

Mistake 2: Incorrect Gross Income Amounts

Some withholding agents electronically transmit gross income amounts that are 100 times too high—for example, reporting $100,000 as $10,000,000. This happens when filers mistakenly include cents in amount fields. Per IRS Publication 1187, all income, withholding, and repayment fields must be reported in whole dollars only. Always round to the nearest dollar and never include cents.

Mistake 3: Missing Taxpayer Identification Numbers

A TIN (Individual Taxpayer Identification Number or Employer Identification Number) is generally required on Form 1042-S to reduce the withholding tax rate below 30%. Without a valid TIN on the recipient's Form W-8BEN or W-8BEN-E, you cannot grant treaty benefits and must withhold at the full 30% rate. Exceptions exist for portfolio interest and certain payments on marketable securities, but these are specific situations. Communicate clearly with foreign recipients about TIN requirements early in your relationship.

Mistake 4: Mismatched Forms Between Recipients and IRS

Any differences between the recipient's copy and the IRS copy will cause processing delays and may result in the IRS disallowing the recipient's refund claims. Use identical information on all copies, including substitute forms if you create custom versions. Double-check before mailing or transmitting.

Mistake 5: Invalid Income Codes or Tax Rates

IRS analysis reveals many forms contain invalid income codes or tax rates that don't correspond to the income type reported. Carefully consult the income code table in Appendix A and exemption code table in Appendix B of the instructions. Common scenarios include using code 06 for scholarships/fellowships, code 01 for interest, and code 15 for royalties—each with specific withholding rate implications.

Mistake 6: Combining Multiple Payment Types on One Form

Each Form 1042-S should report only one type of income (as determined by the income code). If you paid a recipient both royalties and interest, you must file two separate forms—one for each income type. This rule is especially important for substitute forms provided to recipients. IRS Common Errors Guide

What Happens After You File

IRS Processing and Matching

Once you file Form 1042-S, the IRS processes the information and creates records matching withholding agents to recipients. Foreign persons who file U.S. tax returns (typically Form 1040-NR for nonresident aliens) attach their copy of Form 1042-S to claim credit for taxes withheld. The IRS matches the information on the tax return to what you reported—discrepancies trigger inquiries or denial of refund claims.

Electronic Filer Verification

If you file electronically through the FIRE system, you're responsible for checking the transmission status within 5 business days. The IRS will not mail error reports for rejected files. Log into the FIRE system to verify successful acceptance and correct any validation errors immediately.

Treaty Partner Information Sharing

Under tax information exchange agreements, the U.S. shares Form 1042-S data with treaty partner countries. This helps foreign tax authorities verify that their residents properly reported U.S.-source income. Accurate reporting protects your recipients from being accused of underreporting in their home countries.

Recipient Use of the Form

Foreign recipients use Form 1042-S to prepare their U.S. tax returns (if required), claim refunds of over-withheld taxes, and report foreign tax credits on their home country returns. They may also need the form to demonstrate compliance with their local tax authority's foreign income reporting requirements.

Compliance Tracking

The IRS uses Form 1042-S data to monitor compliance with FATCA requirements, track international payment flows, and identify potential underreporting. Consistently accurate filing builds a positive compliance history, while patterns of errors may trigger audits or penalties.

Record Retention

You must retain copies of filed Forms 1042-S (or the ability to reconstruct the data) for at least 3 years from the reporting due date. This enables you to respond to IRS inquiries, amend forms if needed, and provide duplicate copies to recipients who lost their original. IRS Instructions 2018

FAQs

Q1: Do I need to file Form 1042-S if no tax was withheld?

Yes, you must file Form 1042-S even if you didn't withhold any tax—whether due to a treaty exemption, effectively connected income exemption, portfolio interest exception, or any other reason. The form reports the income payment itself and explains why withholding didn't apply. The only exceptions are specific payment types that are explicitly not subject to Form 1042-S reporting (such as wages reported on Form W-2 or amounts reportable on Form 1099).

Q2: What's the difference between Chapter 3 and Chapter 4 reporting?

Chapter 3 refers to traditional withholding rules under sections 1441-1443 of the tax code, covering most types of U.S.-source income paid to foreign persons. Chapter 4 refers to FATCA (Foreign Account Tax Compliance Act) withholding rules designed to combat offshore tax evasion. You indicate which chapter applies by entering "3" or "4" in Box 3, and you must provide both chapter 3 and chapter 4 status codes regardless of which chapter governs the payment.

Q3: Can I combine multiple payments to the same recipient on one Form 1042-S?

Only if all the payments are the same income type (same income code) and subject to the same withholding treatment. For example, if you paid someone $5,000 in royalties in March and $3,000 in royalties in September, you can report $8,000 on a single form. However, if you paid both royalties and interest, you must file separate forms for each income type. Financial institutions must go further and file separate forms for each account, even when the income type is the same.

Q4: What penalties apply if I file late or incorrectly?

For 2018 returns due March 15, 2019, penalties are tiered based on how late you file: $50 per form if filed within 30 days late (maximum $545,500/year, or $191,000 for small businesses); $100 per form if filed 31 days to August 1 (maximum $1,637,500, or $545,500 for small businesses); and $270 per form if filed after August 1 or not filed at all (maximum $3,275,500, or $1,091,500 for small businesses). Intentional disregard carries a penalty of the greater of $540 per form or 10% of the amounts required to be reported, with no maximum cap. Similar penalties apply for failing to furnish correct recipient copies.

Q5: How do I correct an error on a previously filed Form 1042-S?

File an amended Form 1042-S using the exact same unique 10-digit identifier as the original. Check the "Amended" box at the top of the form and enter the amendment number (1 for the first amendment, 2 for the second, etc.). Provide corrected copies to both the IRS and the recipient. If your amendment changes information that affects your Form 1042 annual return, you must also file an amended Form 1042. File amendments as soon as you discover the error—don't wait until the next filing season.

Q6: Must I obtain a U.S. taxpayer identification number for every foreign recipient?

Generally, yes—if you want to apply a reduced treaty rate or other benefit that lowers withholding below 30%. Exceptions include portfolio interest payments, certain payments on marketable securities when you have the necessary documentation, and payments to exempt beneficial owners. Without a valid U.S. TIN (ITIN or EIN), you must withhold at the full 30% rate even if a tax treaty would otherwise allow a lower rate. For treaty claims, the recipient's foreign TIN (FTIN) can sometimes substitute for a U.S. TIN if the sole purpose is claiming treaty benefits.

Q7: What should I do if I don't know the recipient's identity?

Report "Unknown Recipient" in Box 13a and leave the country code blank. However, this should be a last resort after reasonable efforts to obtain documentation have failed. Unknown recipients are subject to withholding at the maximum 30% rate, and your filing may be flagged for review. The high percentage of "Unknown Recipient" forms has drawn IRS attention, so implement procedures to collect W-8 forms before making payments whenever possible. For ongoing payment relationships, make submission of proper documentation a contractual requirement. IRS Common Errors

Sources:

2018 Instructions for Form 1042-S, Internal Revenue Service
Information Reporting for Form 1042-S, IRS.gov
About Form 1042-S, Internal Revenue Service