Form 1042-S: Foreign Person's U.S. Source Income Subject to Withholding (2020)
Understanding tax forms can be intimidating, especially when dealing with international tax rules. Form 1042-S is one of those specialized forms that serves a very specific purpose in the U.S. tax system. This guide breaks down everything you need to know about the 2020 version of this form in plain English, using only authoritative information from the Internal Revenue Service.
What Form 1042-S Is For
Form 1042-S is an information reporting form that documents income paid to foreign persons from U.S. sources and reports any taxes withheld from those payments. Think of it as a receipt or record that shows what a foreign person earned from U.S. sources and what tax was taken out before they received the money.
The form serves three main reporting purposes. First, it reports various types of U.S. source income paid to foreign individuals and entities—including scholarships, fellowships, compensation for services, interest, dividends, royalties, and other types of payments. Second, it reports the amount of tax withheld under Chapter 3 (traditional withholding rules for nonresident aliens) or Chapter 4 (FATCA withholding rules). Third, it tracks distributions of effectively connected income by publicly traded partnerships and certain federal procurement payments to foreign persons subject to special withholding under section 5000C. IRS.gov
Who Files It
Who files it? Every "withholding agent" must file this form. A withholding agent is basically any U.S. or foreign person who controls, receives, or has custody of income paid to a foreign person and has the power to disburse those funds. This could be a university paying a foreign student's scholarship, a company paying royalties to a foreign inventor, or a financial institution paying investment income to a foreign account holder. Even if no tax was actually withheld—perhaps because the income was exempt under a tax treaty—the withholding agent still must file Form 1042-S to document the payment. IRS.gov
What It’s Not Used For
Importantly, Form 1042-S is not used for reporting wages to employees (that's Form W-2), general payments to U.S. persons (that's Form 1099), or dispositions of U.S. real property by foreign persons (that's Form 8288-A). It's specifically for U.S. source FDAP (fixed, determinable, annual, or periodical) income paid to foreign recipients.
When You’d Use Form 1042-S
Late / Amended Context and Deadlines
For the 2020 tax year, Form 1042-S had a firm deadline: March 15, 2021. Both the filing with the IRS and providing copies to income recipients had to be completed by this date. This is earlier than the typical April 15 deadline for many tax forms, so it catches some people off guard. IRS.gov
Late Filing Situations
If you miss the March 15 deadline, you're filing late. However, you can request an automatic 30-day extension by filing Form 8809 (Application for Extension of Time To File Information Returns). If you need even more time, you can submit a second Form 8809 before the first extension expires. It's critical to request extensions as soon as you realize you need them—preferably before the original deadline passes.
Amended Returns
Sometimes mistakes happen. You discover after filing that you reported the wrong amount, used an incorrect tax rate, misspelled the recipient's name, or selected the wrong income or exemption code. When this happens, you must file an amended Form 1042-S as soon as possible to correct the error. The amended form must have the same unique form identifier as the original form, you must check the "Amended" box at the top, and you must enter an amendment number (1 for the first correction, 2 for the second, and so on). You must provide the corrected form to both the IRS and the recipient. If your correction changes information on the related Form 1042 (Annual Withholding Tax Return), you'll also need to amend that form. IRS.gov
Important Exception
There's one important exception: If you provided copies to the recipient but haven't yet filed with the IRS and caught your error, you should file an original (not amended) Form 1042-S with the correct information. Don't check the "Amended" box in this case. Just make sure the corrected version you send to the recipient matches exactly what you file with the IRS.
Key Rules or Details for 2020
Electronic Filing Requirements
The IRS strongly encouraged electronic filing for all filers, but certain entities were legally required to file electronically. Financial institutions (both U.S. and foreign) had to file electronically regardless of how many forms they filed. Other filers (corporations, partnerships, individuals, trusts, estates) had to file electronically if they filed 250 or more Forms 1042-S. Partnerships with more than 100 partners or filing at least 100 Forms 1042-S also fell under the electronic filing requirement. Electronic submissions used the FIRE (Filing Information Returns Electronically) System available at fire.irs.gov. IRS.gov
Unique Form Identifier Requirement
Every Form 1042-S for 2020 needed a unique 10-digit numeric identifier at the top of the form. This identifier tracked individual forms and was essential for matching original forms with any later amendments. The identifier had to be unique to each original form filed for 2020, though you could reuse the same number for a new form in a different tax year.
Separate Forms for Different Situations
Withholding agents had to file a separate Form 1042-S for each recipient, each type of income paid to that recipient, and each different tax rate applied. For example, if you paid both scholarship income and royalty income to the same foreign student, you'd file two forms. If you paid dividends at two different withholding rates to the same foreign investor, you'd file two forms.
Account-by-Account Reporting
U.S. financial institutions and U.S. branches of foreign financial institutions maintaining accounts within the United States faced an additional requirement. They had to report payments of the same type of income made to multiple financial accounts held by the same person on separate Forms 1042-S for each account. This meant even more forms for banks and investment firms.
No Zero Income Reporting
The gross income reported in Box 2 could never be zero. If there was no income, there was no form to file for that situation.
Treaty Benefits and Documentation
For the 2020 tax year, withholding agents reducing withholding based on tax treaty claims needed to ensure they had proper documentation (usually Form W-8BEN or W-8BEN-E). Additionally, when reporting treaty-reduced rates for entities, they needed to include a limitation on benefits (LOB) code showing the entity qualified for treaty benefits under the applicable provision.
Step-by-Step (High Level)
Filing Form 1042-S follows a logical sequence, though the details can get technical. Here's the big-picture process broken into manageable steps.
Step 1: Determine If You're a Withholding Agent
If you paid U.S. source income to a foreign person during 2020 and you had control over those funds, you're likely a withholding agent with filing obligations. Even individuals can be withholding agents if they make such payments in connection with their trade or business.
Step 2: Collect Proper Documentation
Before or at the time of payment, you should have collected documentation from the foreign recipient establishing their status. This typically means Form W-8BEN (for individuals), Form W-8BEN-E (for entities), or other W-8 series forms. This documentation tells you who the recipient is, whether they're claiming treaty benefits, and what rate to withhold.
Step 3: Withhold the Correct Amount (If Required)
Based on the documentation and the type of income, determine if withholding is required and at what rate. Common rates include 30% (standard rate for most income types), 0% (for exempt income or certain treaty benefits), 10% (reduced treaty rates), and various other rates depending on the circumstances. Make the payment to the foreign person after withholding.
Step 4: Complete Form 1042-S Accurately
Fill out the form with required information including your information as withholding agent (name, address, EIN, status codes), payment details (income code, gross income amount, tax withheld, tax rate, exemption codes, chapter indicator), and recipient information (name, country code, address, status codes, tax identification numbers if available). Each box on the form has specific instructions and allowable codes—don't make up codes or blend tax rates.
Step 5: File Electronically or on Paper by March 15
If you meet the electronic filing requirements, submit your forms through the FIRE System. Otherwise, you can file on paper using Form 1042-T (Annual Summary and Transmittal of Forms 1042-S) to transmit Copy A to the IRS. Send to the address listed in the Form 1042-T instructions. Electronic filers should check the FIRE System within 5 business days to verify successful transmission.
Step 6: Provide Copies to Recipients by March 15
Give Copies B, C, and D to each income recipient by the same deadline. The recipient copy must exactly match what you filed with the IRS—any discrepancies can cause serious problems with the recipient's refund claims.
Step 7: File Form 1042 and Make Deposits
Separately from Form 1042-S, you must also file Form 1042 (Annual Withholding Tax Return) reporting your total withholding and payments. You also need to make timely tax deposits of withheld amounts throughout the year using the Electronic Federal Tax Payment System (EFTPS).
Step 8: Keep Records
Retain copies of all Forms 1042-S filed (or have the ability to reconstruct the data) for at least 3 years after the reporting due date. IRS.gov
Common Mistakes and How to Avoid Them
The IRS has identified several recurring errors on Form 1042-S that delay processing, trigger penalties, or cause recipients' refund claims to be denied. Here are the most common mistakes and how to prevent them.
Frequent Errors
Incomplete Required Fields
Many filers leave critical boxes blank. At minimum, you must complete the unique form identifier, Boxes 1 (income code), 2 (gross income), 3 (chapter indicator), 7a (withholding credit), 12a-12i (withholding agent information), 13a-13d (recipient basic information), and the appropriate status code boxes (12b, 12c, 13f, 13g depending on payment type). Double-check before filing that all required fields contain valid entries.
Listing Multiple Recipients
Box 13a should contain only one recipient's name. If a payment has joint owners, you typically report the full amount to all joint owners on one form filed with the IRS, but if individual owners request their own copies, you provide separate recipient copies showing each owner's allocable share. Never just list multiple names in the recipient field on the IRS copy.
Using Invalid Codes
Only use income codes, exemption codes, status codes, and country codes that appear in the official IRS instructions. Don't make up codes or use outdated codes from prior years. Common errors include using deleted status codes, using country code "US" for recipients (generally not allowed), or using exemption code "15" when it doesn't match the recipient's chapter 4 status.
Incorrect Tax Rates or Rate Blending
Use only tax rates specifically allowed by statute, regulations, or tax treaty provisions. Never try to "blend" rates by averaging. If the tax rate changed during the year for the same recipient and income type, file separate Forms 1042-S for each rate period.
Reporting Zero Income
Box 2 (gross income) cannot be zero. If there's no income, there's nothing to report on Form 1042-S.
Mismatched Forms
The copy filed with the IRS (Copy A) must exactly match the copies provided to recipients (Copies B, C, D). Discrepancies will cause the IRS to potentially disallow refund or credit claims. This is one of the most frustrating mistakes for recipients.
Wrong Income Codes for Payment Type
The income code in Box 1 must accurately reflect the nature of the payment. Scholarships have different codes than royalties, which differ from dividends. Using the wrong code mischaracterizes the income and can affect tax treatment.
Failing to File When Withholding Is Zero
Even when no tax was withheld—because of a treaty exemption, effectively connected income treatment, or other reason—you still must file Form 1042-S if you made a reportable payment. The only exceptions are specific situations listed in the "Amounts That Are Not Subject to Reporting" section of the instructions.
Not Filing Amended Returns for Discovered Errors
When you discover a mistake after filing, correct it immediately by filing an amended return. Hoping the IRS won't notice is not a strategy—you remain liable for underwithholding, and recipients can't claim proper credits with incorrect forms.
Missing Electronic Filing Threshold
Financial institutions sometimes mistakenly file on paper, not realizing they must file electronically regardless of volume. Other filers may not properly count their forms to see if they exceed 250. IRS.gov
What Happens After You File
Once you've filed Form 1042-S, several things occur behind the scenes and a few responsibilities remain.
IRS Processing
The IRS processes your Form 1042-S submissions and matches them against the related Form 1042 you filed. They verify that the total amounts withheld on all Forms 1042-S equal the totals reported on Form 1042. The information also gets matched to the recipient's taxpayer identification number (if provided) for tracking purposes.
Recipient Use
Foreign persons who receive Form 1042-S use it to prepare their U.S. tax returns if they're required to file (generally Form 1040-NR for individuals). Even if they're not required to file, they may use Form 1042-S to claim a refund of over-withheld taxes. The form serves as proof of income and withholding, much like a Form W-2 does for employees or Form 1099 does for domestic independent contractors.
Treaty Country Reporting
Some foreign recipients need Form 1042-S to report their U.S. income on their home country tax returns and claim foreign tax credits. The form provides the documentation needed to prove they already paid U.S. tax on the income.
Potential IRS Inquiries
If the IRS identifies errors, inconsistencies, or incomplete information during processing, they may send you a notice requesting clarification or correction. Respond promptly to these notices and provide the requested information. In some cases, the IRS may correct obvious errors themselves, but they may also assess penalties if they determine you failed to meet filing requirements.
Penalties for Non-Compliance
Late filing or failure to furnish correct forms triggers escalating penalties. Filing correctly within 30 days of the deadline costs $50 per form (capped at $565,000, or $197,500 for small businesses). Filing more than 30 days late but by August 1 increases the penalty to $110 per form (capped at $1,696,000, or $565,000 for small businesses). Filing after August 1 or not filing at all costs $280 per form (capped at $3,392,000, or $1,130,500 for small businesses). Intentional disregard of filing requirements eliminates the cap and increases the penalty to the greater of $560 or 10% of the amounts required to be reported, per form. Similar penalties apply for failing to furnish correct forms to recipients. IRS.gov
Liability for Underwithholding
If the IRS determines you underwithheld taxes—and you knew or should have known about it—you become personally liable for the tax, plus penalties and interest. This is why accurate documentation collection and careful withholding calculations are so critical.
Record Retention Period
You must keep your copies of Forms 1042-S (or have the ability to reconstruct the data) for at least 3 years from the filing due date. The IRS can audit your withholding and reporting during this period.
FAQs
Q1: I'm a foreign person who received Form 1042-S. Do I need to file a U.S. tax return?
Not necessarily. If all your U.S. source income was correctly withheld at the full required rate and reported on Form 1042-S, you may not need to file a U.S. tax return—you can simply keep the form for your records. However, you should file if: (a) you want to claim a refund because too much tax was withheld, (b) the withholding rate was incorrect and you owe additional tax, (c) you have other U.S. source income not reported on Form 1042-S, or (d) you need to file to claim treaty benefits or deductions that weren't applied at payment. When in doubt, consult a tax professional familiar with nonresident alien taxation.
Q2: I'm a withholding agent who paid income to a foreign person in December 2020, but I didn't receive their Form W-8 documentation. What should I do?
You still must file Form 1042-S by March 15, 2021, and report the payment. Without proper documentation, you're required to withhold at the maximum applicable rate (typically 30%) and must use the IRS presumption rules to determine how to report the payment. If you cannot reliably associate the payment with valid documentation, you may need to report the recipient as "unknown recipient" in certain circumstances and leave the country code blank. You should also continue trying to obtain documentation from the payee. See IRS Publication 515 for detailed presumption rules.
Q3: Can I file an amended Form 1042-S electronically if I originally filed on paper?
The electronic filing requirement applies separately to original and amended returns. If your original filing was on paper because you had fewer than 250 forms, your amended returns can also be filed on paper—unless you're a financial institution, which must always file electronically. However, the IRS encourages electronic filing even when not required because it's faster and less prone to processing errors.
Q4: I have 500 original Forms 1042-S to file, so I filed electronically. I later discovered errors on 100 of them. Do I have to file all 100 amended forms electronically?
Not necessarily. The electronic filing threshold (250 or more forms) applies separately to original and amended forms for non-financial institutions. Since you only have 100 amended forms, you can choose to file them on paper. However, electronic filing is still recommended for speed and accuracy, and you've already gone through the process of setting up electronic filing for your originals.
Q5: What's the difference between Chapter 3 and Chapter 4 withholding, and why does it matter for Form 1042-S?
Chapter 3 refers to traditional withholding on foreign persons under sections 1441-1443 of the tax code—this covers most types of U.S. source FDAP income paid to nonresident aliens and foreign entities. Chapter 4 refers to FATCA (Foreign Account Tax Compliance Act) withholding under sections 1471-1474, which applies to "withholdable payments" (primarily U.S. source FDAP income) paid to certain foreign financial institutions and other foreign entities that don't comply with FATCA requirements. For each Form 1042-S, you must indicate which chapter applies using the chapter indicator in Box 3. You also must provide both Chapter 3 and Chapter 4 status codes for withholding agents and recipients. The chapter that applies affects which exemption codes you use and how you classify the parties involved. Many payments are subject to rules under both chapters, but withholding typically only occurs under one chapter for any given payment.
Q6: The foreign person I paid is from a country that has a tax treaty with the U.S. How do I report treaty benefits on Form 1042-S?
If the recipient properly claimed treaty benefits by providing Form W-8BEN (individuals) or Form W-8BEN-E (entities) with the treaty article and claiming a reduced rate, you report this on Form 1042-S by: (1) using the reduced tax rate in Boxes 3b and/or 4b, (2) entering the appropriate treaty exemption code in Box 3a (such as "01" for income exempt from withholding under treaty), (3) entering the recipient's country code in Box 13b (which should match the treaty country), and (4) for entity recipients claiming treaty benefits, including the appropriate limitation on benefits (LOB) code in Box 13j showing which treaty provision qualified them for benefits. Keep the Forms W-8 on file as they are your documentation supporting the reduced withholding.
Q7: I made several different types of payments to the same foreign professor—compensation, royalties, and honorarium. Do I file one Form 1042-S or multiple?
You must file a separate Form 1042-S for each type of income (as determined by the income code). Compensation, royalties, and honoraria have different income codes, so you'd file three separate Forms 1042-S for this professor. Additionally, if any one type of income was withheld at different rates during the year, you'd file separate forms for each rate period for that income type. This ensures accurate reporting and allows the recipient to properly characterize each income type on their tax return.
Conclusion
Form 1042-S plays a vital role in the U.S. tax system's reporting and withholding framework for foreign persons. While the form's technical requirements can seem daunting, understanding its purpose, deadlines, and common pitfalls helps both withholding agents and foreign recipients navigate their obligations successfully. The 2020 version followed well-established rules, with the key deadline of March 15, 2021, mandatory electronic filing for financial institutions and high-volume filers, and strict penalties for non-compliance.
For withholding agents, the most important takeaway is this: collect proper documentation, withhold correctly, file timely, and correct errors immediately when discovered. For foreign recipients, keep your Form 1042-S for your records and evaluate whether you need to file a U.S. tax return or claim a refund. When in doubt, consult the detailed instructions at IRS.gov/Form1042S or seek guidance from a tax professional experienced in international taxation and withholding requirements.
Sources
All information in this guide comes from official IRS sources:
- About Form 1042-S
- 2020 Instructions for Form 1042-S (PDF)
- Who Must File Form 1042-S
- IRS Publication 515: Withholding of Tax on Nonresident Aliens and Foreign Entities
