Form 1042 Checklist: 2020 Tax Year
Form 1042 serves as the annual withholding tax return for reporting federal income tax withheld on United States-source income paid to foreign persons during the 2020 calendar year.
Withholding agents use this return to report tax withheld under Chapter 3 and Chapter 4 of the
Internal Revenue Code on payments to nonresident alien individuals, foreign corporations, foreign estates, and foreign trusts.
The 2020 instructions reflect updated withholding rules for certain investment income categories and clarify the treatment of payments made during the pandemic period. Understanding the proper structure and filing requirements helps withholding agents meet their reporting obligations accurately and avoid penalties.
Who Must File Form 1042
You must file Form 1042 if you serve as a withholding agent who made reportable payments to foreign persons during 2020. A withholding agent includes any individual, corporation, partnership, trust, estate, or financial institution that controls, pays, or disposes of U.S.-source income subject to withholding.
Financial institutions that file information returns must submit their Forms 1042-S electronically through the IRS FIRE system. You must also file if you reported specified federal procurement payments under Section 5000C or made distributions from a publicly traded partnership under
Section 1446.
Understanding Form 1042 Structure and Sections
The 2020 Form 1042 consists of four main sections without any Schedules A, B, or C
- Section 1 records your federal tax liability for each quarter-monthly period through lines 1
through 60, showing when payments occurred and when tax liability arose.
- Section 2 reconciles total payments of U.S.-source FDAP income, verifying that amounts
reported match your Forms 1042-S filings.
- Section 3 addresses potential Section 871(m) transactions involving derivative contracts
that reference U.S. stocks or other underlying securities.
- Section 4 reports dividend equivalent payments when you operate as a qualified
derivatives dealer under your QI agreement.
Withholding agents report all tax liability in Section 1 and reconcile payments in Section 2 without completing separate schedules for different income types. Income that is effectively connected with the U.S. trade or business does not appear on Form 1042 and must be reported on Form 8804 instead.
How to Complete Form 1042 for the 2020 Tax Year
Step 1: Enter Filer Identification and Chapter Status Codes
Enter your complete employer identification number and legal entity name exactly as registered with the IRS on the form header. Confirm your Chapter 3 and Chapter 4 status codes from the
Type of Recipient code list found in Publication 515.
The 2020 Form 1042 applies only to payments made between January 1 and December 31,
2020. You cannot combine payments from 2019 or defer 2020 payments to your 2021 return.
Step 2: Complete Section 1 Federal Tax Liability
Report your federal tax liability for each quarter-monthly period during 2020 on lines 1 through
60. Quarter-monthly periods end on the 7th, 15th, 22nd, and last day of each month, and you must report liability for the period when you paid or distributed income.
Include tax withheld on all payment types, such as dividend income, interest income, royalties, rents, and compensation paid to nonresident aliens and other foreign persons. The tax liability must be reported regardless of whether it falls under Chapter 3 or Chapter 4 requirements.
Step 3: Calculate Chapter 3 and Chapter 4 Tax Liability
Sum all monthly withholding totals from Section 1 by adding lines 5, 10, 15, 20, 25, 30, 35, 40,
45, 50, 55, and 60 for calendar year 2020. Calculate your total tax liability under Chapter 3 for
Sections 1441 and 1442 withholding separately from your Chapter 4 FATCA withholding liability.
Enter your total Chapter 3 tax liability on line 64b and your total Chapter 4 tax liability on line
64c. These figures must match the total deposits you made during 2020 plus any overpayment you applied to your 2020 tax liability.
Step 4: Apply Treaty-Based Withholding Reductions
Withholding agents who applied reduced withholding rates under a U.S. tax treaty during 2020 must retain documentation supporting each rate reduction. Verify that you obtained Form
W-8BEN from individual foreign persons or Form W-8BEN-E from foreign entities before applying any reduced treaty rate.
Retain all treaty documentation identifying the applicable treaty, the beneficial owner’s country of residence, and the specific rate reduction claimed. You do not submit treaty documentation or
Forms W-8 with your tax return, but must keep them in your files.
Step 5: Prepare Forms 1042-S for Each Foreign Recipient
Prepare a separate Form 1042-S for each foreign person who received reportable U.S.-source income during 2020. Each Form 1042-S must report the specific income type, amount paid, and tax withheld for individual recipients, and all forms must match the totals reported on your primary Form 1042 return.
For paper filing, transmit Forms 1042-S to the IRS using Form 1042-T (Annual Summary and
Transmittal), filed separately from your Form 1042. Financial institutions must file Forms 1042-S electronically regardless of the number of forms filed, and all filers should verify their filing method requirements.
Step 6: Complete Section 2 Reconciliation of Payments
Disclose the aggregate amount of U.S.-source income paid to all foreign recipients in 2020 on line 62 of your Form 1042. Complete Section 2 to reconcile U.S.-source FDAP income paid to foreign persons during the year and verify that the totals match amounts reported on Forms
1042-S.
Report amounts you withheld under Chapter 4 and amounts not subject to withholding. Identify payments to recipients whose Chapter 4 status established no withholding requirement, excluded nonfinancial payments, grandfathered obligations, and effectively connected income with a U.S. trade or business.
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Step 7: Sign and Submit Your Return Package
An authorized officer must sign Form 1042 for the 2020 tax year, and the IRS will not accept an unsigned return. Print the signer’s name, title, and signature date on the designated lines, understanding that delegation of authority does not eliminate the signature requirement.
Mail your completed Form 1042 by March 15, 2021, to the Internal Revenue Service, P.O. Box
409101, Ogden, UT 84409. Submit paper Forms 1042-S separately using Form 1042-T, and attach Schedule Q (Form 1042) if you operate as a qualified derivatives dealer who made payments in that capacity.
Key 2020 Tax Year Reporting Requirements
Pandemic-related withholding relief programs did not suspend or reduce withholding obligations for payments to foreign persons under Sections 1441 or 1442 during 2020. Treaty-based withholding reductions remained fully in effect throughout 2020, with no temporary suspension or modification of treaty benefit claiming permitted on this form.
Withholding must occur at the time you make each payment, and you cannot defer withholding to match deposit timing. Backup withholding under Section 3406 does not appear on Form 1042 and must be reported on Form 1099 and related forms instead.
If you need additional time to file, you may request an automatic extension using Form 7004, though this extension does not extend your time to pay any tax due. Publication 515 provides detailed guidance on withholding requirements and tax treaty applications for payments to foreign persons.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
