IRS Form 1042-S (2021): U.S. Tax Reporting for Foreigners

What Form 1042-S Is For

IRS Form 1042-S (2021) is used to report U.S.-source income paid to foreign persons, including nonresident aliens, foreign partnerships, and foreign corporations. The form is generally filed by a withholding agent—such as a business, university, or financial institution—that makes payments like interest, dividends, royalties, rents, or scholarships. It shows both the gross income and any tax withheld for federal income tax purposes. Even if no tax was withheld due to a tax treaty or exemption, the form must still be filed to report the income paid. Filing ensures compliance with IRS income tax filing requirements for cross-border transactions.

When You’d Use Form 1042-S

You must file IRS Form 1042-S (2021) if you are a U.S. withholding agent—such as a business, school, or financial institution—making payments of U.S.-source income to foreign individuals or entities. This applies whether the income is earned or unearned, and regardless of whether tax was withheld.

Key situations include the following:

1. You paid interest, dividends, royalties, rent, or compensation to a nonresident alien or foreign company.
   
   
2. You issued scholarships, prizes, or fellowships to an international student or researcher.
   
   
3. You made federal procurement payments or other reportable income under a tax treaty.

For the 2021 tax year, all forms must be filed and recipient copies furnished by March 15, 2022. You can request additional time by filing Form 8809 for IRS extensions or by faxing a written request for recipient extensions before the due date.

Key Rules and Details for 2021

When filing IRS Form 1042-S (2021), the Internal Revenue Service set several key rules to ensure accurate reporting of foreign income and withholding. Use the following guidelines to stay compliant and avoid errors:

• Electronic Filing Requirements: Financial institutions are required to file electronically, and other withholding agents must do so if submitting 250 or more tax forms.
  
  
• Unique Form Identifier: Each form must include a unique 10-digit identifier to track amendments and prevent duplicates.
  
  
• Separate Forms for Each Income Type: File one form per recipient and per income category, such as earned income, unearned income, or federal procurement payments.
  
  
• Reporting Income by Type: Payments classified as effectively connected income should be reported on the recipient’s tax return, not on Form 1042-S.
  
  
• Foreign Income and Exclusions: Some foreign earnings may qualify for a foreign earned income exclusion or reduced federal tax under an applicable tax treaty with a foreign country.
  
  
• Filing Accuracy: Withholding agents should confirm net earnings, filing status (such as married filing jointly), and tax withholding to ensure the correct tax liability is reported.
  
  
• Secure Submission: Always use the IRS’s secure system to file—look for the locked padlock icon—to confirm that your submission is protected and complete.

Step-by-Step Filing Process (High Level)

1. Confirm parties and documents: Identify each recipient as a nonresident alien individual, qualified intermediary, flow-through entity, foreign branch, or foreign trust, and collect current W-8s and required tax forms from the Internal Revenue Service.
   
   
2. Classify payments: Determine whether the income earned is earned income or unearned income, and whether any amount is effectively connected income (reported by the recipient on a tax return).
   
   
3. Determine source and period: Ensure that the amounts represent U.S.-source foreign income for the entire tax year. Please note the foreign country codes required for reporting income.
   
   
4. Calculate withholding: Apply applicable tax rates to compute federal tax withheld and the recipient’s potential tax liability; reconcile amounts to net earnings and any foreign earnings.
   
   
5. Consider special rules: If the recipient claims foreign-earned income or a foreign-earned income exclusion, confirm the tax home and bona fide resident tests. Note that a personal exemption does not affect Form 1042-S reporting.
   
   
6. Account for filing status notes: If guidance mentions married filing jointly, married filing, qualifying surviving spouse, or surviving spouse, remind recipients that when one spouse files, rules may affect any tax refund—this is informational for both you and the payee.
   
   
7. Prepare and e-file each form properly: Prepare and submit one form per recipient and income type, and e-file securely (look for the locked padlock icon).
   
   
8. Finalize and furnish: Ensure recipient copies are sent, promptly address any unreported income, and maintain accurate records to ensure compliance.

Common Mistakes and How to Avoid Them

Filing IRS Form 1042-S (2021) can be complex, and even minor errors may cause penalties or processing delays. Here are frequent mistakes—and how to prevent them:

• Using the wrong tax year form: Always download and use the correct tax forms for the year you’re reporting to avoid rejections.
  
  
• Combining different income types: File one form per income type and recipient to ensure proper reporting of earned or unearned income.
  
  
• Omitting key data fields: Double-check that the unique identifier, EIN, income code, and federal tax withheld are entered correctly.
  
  
• Incorrect recipient details: Verify names, addresses, and foreign country codes against original W-8 forms.
  
  
• Filing duplicates: Submit only once—either electronically or by paper—to prevent duplicate records.
  
  
• Ignoring amendments: If you observe an error, promptly file an amended form to correct unreported income and maintain compliance with the Internal Revenue Service.

What Happens After You File

After submitting IRS Form 1042-S (2021), the Internal Revenue Service reviews the data and compares it against the related federal return for accuracy. The agency verifies that the total amount of income and wages reported matches what the taxpayer or withholding agent submitted. If discrepancies arise under any IRC section, the IRS may issue a notice.

The information helps identify resident aliens, U.S. citizens, and others physically present in the country who may need to file a separate return. It can also reveal errors involving a non-qualified intermediary or missing Schedule B entries. Since reporting is on a calendar year basis, all payments subject to withholding must be complete to maintain compliance and prevent audits.

FAQs

What are the income tax filing requirements for foreign individuals who receive U.S.-source payments?

Foreign individuals must file IRS Form 1042-S (2021) if they receive taxable U.S.-source income, even when no tax is withheld.

How does the foreign earned income exclusion affect Form 1042-S reporting?

The foreign earned income exclusion applies only to foreign income and does not reduce reporting or withholding on Form 1042-S.

Does my filing status affect how foreign income is reported?

Your filing status affects overall income tax liability, but not what appears on Form 1042-S.

What is the due date for filing Form 1042-S with the IRS?

The form and recipient copies are due March 15 each year; extensions require Form 8809.

Are federal tax withholding rates the same for all income types?

No, federal tax rates differ for earned and foreign income, depending on the type of payment.