Form 1042 (2014) Checklist
Purpose
Form 1042 reports annual federal tax withheld on U.S. source income paid to foreign persons under Chapters 3 and 4 (FATCA). The 2014 version introduces Foreign Account Tax Compliance Act requirements, establishing new Chapter 4 withholding and reporting obligations separate from existing Chapter 3 rules.
Filing Steps
Step 1: Confirm Filing Requirement
Determine if you are a withholding agent required to file Form 1042 for 2014 income. You must file if you paid U.S.-source fixed or determinable annual or periodical income to foreign persons, including nonresident aliens, foreign partnerships, foreign corporations, foreign estates, or foreign trusts. FATCA Chapter 4 obligations apply if you paid withholdable payments to foreign financial institutions or nonfinancial foreign entities without established Chapter 4 status documentation. Note that Chapter 4 withholding became effective July 1, 2014, not January 1, 2014.
Step 2: Gather Required Forms
Collect all Forms 1042-S issued for 2014. Report the total number filed on paper and electronically on lines 61a and 61b. Both submission methods are permitted in 2014. If you file 250 or more Forms 1042-S or are a financial institution, you must submit them electronically. Form 1000 (Ownership Certificate) is rarely used and applies only to interest on bonds with tax-free covenants issued before 1934.
Step 3: Complete Section 1 - Record of Federal Tax Liability
Enter the tax liability accrued for each payment period ending on the dates specified in lines 1 through 60. Report only tax liabilities for periods ending on the 7th, 15th, 22nd, and last day of each month, then calculate monthly totals. Do not report federal tax deposits on these lines. Include liabilities regardless of whether they fall under Chapter 3 or Chapter 4, and include any excise tax on specified federal procurement payments.
Step 4: Report Gross Income Amounts
Enter gross U.S. source FDAP income reported on all Forms 1042-S on line 62a for payments other than substitute payments, line 62b(1) for substitute dividend payments, and line 62b(2) for other substitute payments. Line 62c requires the sum of all three categories. Ensure amounts reconcile with your actual Forms 1042-S to avoid unnecessary IRS correspondence.
Step 5: Report Tax Withheld
Enter the total tax withheld by you as the withholding agent on line 63a. Under the 2014 FATCA rules, separately track and report taxes withheld by other withholding agents on line 63b(1) for non-substitute payments and line 63b(2) for substitute dividend payments to distinguish Chapter 3 and Chapter 4 withholding. Line 63c reports amounts repaid under reimbursement procedures, and line 63d reports amounts assumed by the withholding agent.
Step 6: Calculate Total Net Tax Liability
Calculate total net tax liability on line 64. Line 64a allows adjustments for underwithheld tax on corporate distributions made during 2014 if the distributing corporation made a reasonable estimate of earnings and profits and paid the underwithheld tax by March 15, 2015. Lines 64b and 64c require separate subtotals for the net liabilities of Chapter 3 and Chapter 4. Line 64d requires the excise tax on specified federal procurement payments, calculated as total payments multiplied by 2 percent.
Step 7: Report Tax Deposits and Payments
Report all electronic funds transfers made for 2014 on line 65. Include all deposits made through the Electronic Federal Tax Payment System. If you requested an extension of time to file Form 1042 using Form 7004, also enter payments made with that extension request on line 65. All deposits must be made electronically through EFTPS regardless of the amount.
Step 8: Calculate Balance Due or Overpayment
Calculate total payments on line 68 and determine whether you have a balance due on line 69 or an overpayment on lines 70a and 70b. For 2014, separately identify overpayments attributable to overwithholding on U.S. source income on line 70a versus overpayments attributable to excise tax on line 70b. On line 71, elect whether to credit the overpayment to the 2015 Form 1042 or request a refund.
Step 9: Complete Section 2 - Reconciliation (Optional)
Complete Section 2 (Reconciliation of Payments of U.S. Source FDAP Income) only if you choose to do so. This section is optional for 2014 but will become mandatory in future years. Lines 2a through 2e list exclusions from Chapter 4 withholding, including recipients with no Chapter 4 withholding requirement, excluded nonfinancial payments, grandfathered obligations, effectively connected income, and excluded offshore payments. This reconciliation supports FATCA implementation.
Step 10: Complete Section 3 - Derivative Contracts
Check the box in Section 3 if you are a dealer or trader in notional principal contracts or other derivative contracts that reference in whole or in part one or more U.S. securities and made payments on such agreements during the calendar year. This section is new in the 2014 form to capture payments on derivatives under Chapter 4.
Step 11: Sign and Submit
Sign and date the return. State the capacity in which you are acting, such as a withholding agent or representative. If a paid preparer signs, they must provide their Preparer Tax Identification Number, their firm's Employer Identification Number, and indicate whether they are self-employed. Attach all Forms 1042-S and supporting documentation. The form must reflect only 2014 income year data.
Step 12: Meet Filing Deadline
File Form 1042 by March 15 of the year following the calendar year in which the income was paid. For 2014 returns, this deadline is March 16, 2015, because March 15, 2015, falls on a Sunday. Mail completed returns to the Ogden Service Center address specified in the instructions. You may request an automatic six-month extension using Form 7004, but this does not extend the time for payment of tax.
Key 2014 Updates
FATCA Chapter 4 Implementation
FATCA Chapter 4 withholding obligations took effect on July 1, 2014. The 2014 Form 1042 is the first version to incorporate Chapter 4 requirements. The IRS released this version to allow withholding agents time to implement new FATCA rules before filing in 2015 for 2014 income. Withholding agents making non-financial payments are generally not affected by the new Chapter 4 requirements.
Excise Tax Reporting
Line 64d introduces the 2 percent excise tax on specified federal procurement payments. This excise tax applies to payments made under contracts with the United States Government entered into after January 1, 2011, for goods manufactured or produced in countries that are not parties to an international procurement agreement with the United States, or for services provided in such countries. Calculate this tax as total qualifying payments multiplied by 0.02.
Optional Reconciliation Section
Section 2 (Reconciliation of Payments of U.S. Source FDAP Income) is new and optional for 2014. It requires reconciliation between Chapter 4 FDAP income subject to withholding, income exempt from Chapter 4 withholding, and total reportable income. This section will become mandatory for tax years after 2014 to ensure proper FATCA compliance reporting.
Separate Chapter 3 and 4 Tracking
Lines 63b(1) and 63b(2) now separately report taxes withheld by other withholding agents for non-substitute payments versus substitute dividend payments, supporting Chapter 4 tracking requirements introduced in 2014. Lines 64b and 64c require separate reporting of net tax liability under Chapter 3 versus Chapter 4 to distinguish between traditional withholding and new FATCA withholding obligations.
Deposit Requirements
All deposits must be made electronically through the Electronic Federal Tax Payment System regardless of amount. Deposits of $2,000 or more must be made within three business days after the end of any quarter-monthly period. Deposits of at least $200 but less than $2,000 must be made within 15 days after the end of the month. Amounts under $200 may be paid with the return by the March 15 deadline.
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This checklist is for educational purposes only and does not constitute tax or legal advice. Always review official IRS instructions and consult a qualified professional for guidance.
