Form 1042, officially titled the Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, reports taxes withheld on income paid to nonresident aliens and foreign entities. Withholding agents—such as employers, financial institutions, partnerships, and other payers—use this form to summarize all tax withholding activities for the year. It ensures that payments made to foreign persons are reported correctly in the Internal Revenue Code.
This guide explains how to complete Form 1042 for the 2020 tax year filed in 2021. It follows the IRS 2020 Instructions for Form 1042 and provides clear steps for withholding agents who must report income subject to U.S. withholding tax. Whether you’re a first-time filer or managing multiple filings as part of a large organization, understanding each section of the form is essential to staying compliant with IRS requirements.
Filing Form 1042 accurately helps prevent costly errors, late payment penalties, and compliance issues with the IRS. Withholding agents are personally responsible for reporting the total amount of tax withheld and ensuring payments are made on time. This guide will help you confidently complete your filing, using plain, accessible explanations designed for those unfamiliar with complex tax terms.
Understanding IRS Form 1042
Form 1042 is the annual withholding tax return that reports income paid to foreign individuals, nonresident alien individuals, foreign corporations, and other foreign entities. Withholding agents use it to declare the tax withheld on U.S.-sourced income, such as interest, dividends, and royalties. The form ensures that taxes are properly withheld and reported under Chapter 3 (withholding certain income from foreign persons) and Chapter 4 of the Internal Revenue Code (commonly known as FATCA).
What Is Form 1042?
Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, summarizes all payments made during a calendar year subject to U.S. withholding tax. It complements:
- Form 1042-S reports income and tax withheld for each foreign recipient.
- Form 1042-T is the transmittal form used when submitting paper copies of Form 1042-S.
These forms provide the Internal Revenue Service (IRS) with complete information about the amount of income paid, the tax liability, and the tax withheld from foreign recipients.
Who Must File Form 1042
You must file Form 1042 if you are a withholding agent responsible for reporting or paying tax on the income of foreign persons. This includes:
- Financial institutions, employers, and corporations that make payments to foreign individuals or entities.
- Qualified intermediaries (QIs), withholding foreign partnerships (WPs), and withholding foreign trusts (WTs) that handle payments on behalf of foreign payees.
- Government agencies or contractors making payments subject to federal withholding rules.
- Partnerships or businesses that pay effectively connected income or gross income to nonresident aliens or foreign corporations.
Even if no tax was ultimately withheld due to an income tax treaty or reduced rate, filing Form 1042 is still required if any Form 1042-S was filed. This ensures that all U.S. source income of foreign persons is adequately documented, allowing the IRS to verify compliance and apply the correct treaty benefits where appropriate.
Filing Form 1042 accurately helps withholding agents remain compliant with the Internal Revenue Service, avoid late filing penalties, and ensure that all amounts paid and tax liabilities are correctly reported for the applicable tax year.
What’s New for the 2020 Tax Year
The Form 1042 2020 instructions introduced several important updates that affect how withholding agents report U.S. source income from foreign individuals. These changes reflect new IRS regulations, clarified filing requirements, and streamlined reconciliation procedures. Understanding these updates helps filers comply with the Internal Revenue Code and avoid errors or penalties when submitting annual returns.
Form Changes and Clarifications
The 2020 version of Form 1042 included several notable modifications:
- New Section Title – “Computation of Tax Due or Overpayment”: Added to help filers separate tax liability calculations from adjustments such as overpayments or credits.
- Record of Tax Liability Clarification: A new note under Lines 1–60 directs filers to transfer totals from the Record of Tax Liability table to Lines 64b through 64d. This ensures proper reconciliation between reported liability and payments.
- Schedule Q Requirement for QDDs: Qualified Derivatives Dealers (QDDs) must now attach Schedule Q (Form 1042) instead of submitting a separate written statement to disclose their tax position.
Regulatory Updates
- Final Regulations (January 2, 2020): Issued under Chapters 3 and 4, these rules reduced the scope of information withholding agents must collect, such as foreign taxpayer identification numbers (TINs) and dates of birth.
- Section 871(m) Transition Relief (Notice 2020-2): Extended the phase-in period for QDDs and delayed the enforcement of sure dividend equivalent withholding obligations.
- Proposed Regulations (December 18, 2018): The IRS confirmed that withholding agents may rely on these rules, which simplify partnership and trust reporting and improve procedures for overwithholding and underwithholding corrections.
These 2020 updates improved reporting efficiency and ensured greater consistency between Form 1042, Form 1042-S, and related FATCA documentation for foreign payees.
Step-by-Step Instructions for Completing Form 1042
The Form 1042 2020 instructions outline specific steps that every withholding agent must follow to complete the form accurately. These steps ensure that all U.S. source income of foreign persons is reported correctly, along with the tax withheld, tax liability, and payments made. Each stage below provides context and direction to help filers meet Internal Revenue Service (IRS) requirements.
Step 1 – Gather Required Information
Before starting the form, withholding agents should collect all necessary records and identification numbers. The following items are required to ensure accurate reporting:
- Employer Identification Number (EIN): Use the appropriate EIN for your filing status, such as QI-EIN, WP-EIN, or WT-EIN.
- Forms 1042-S: Gather every Form 1042-S filed for the tax year to reconcile totals later.
- Payment and Income Records: Keep detailed documentation of all amounts paid, income subject to withholding, and gross income for each foreign recipient.
- Chapter 3 and Chapter 4 Status Codes: Identify your classification under both chapters to ensure accurate withholding categorization.
- Deposit and Payment Confirmations: Retain receipts or confirmations from the Electronic Federal Tax Payment System (EFTPS).
- Supporting Documentation: Collect Forms W-8 or W-9, copies of income tax treaties, and any documents showing reduced rates or treaty benefits.
- Reconciliation Worksheets: Maintain worksheets or summaries showing prior adjustments and any filed amended returns.
This information will help you complete the form efficiently and reduce the chance of errors or delayed processing.
Step 2 – Complete the Form Header
Withholding agents must carefully complete the top portion of the form. Each field identifies the filer and establishes the reporting period.
- Enter your legal name and business address, ensuring the information matches your federal income tax return. Include suite or unit numbers where applicable.
- Use the correct EIN. If you are filing as a qualified intermediary (QI), withholding foreign partnership (WP), or withholding foreign trust (WT), use the respective EIN issued under that agreement.
- Indicate the calendar year being reported, which should correspond to the 2020 tax year.
- Provide both Chapter 3 and Chapter 4 (FATCA) status codes. Both must be entered, even if your withholding activities only fall under one chapter.
- Mark the “Amended Return” box only if you submit a corrected return that replaces a prior filing.
Completing this section accurately helps the IRS identify your filing category and ensures that your annual withholding tax return aligns with all related information returns.
Step 3 – Section 1: Record of Federal Tax Liability
In this section, you will record your tax liability for each period within the calendar year.
- Report your tax liability for every quarter-monthly period (the 7th, 15th, 22nd, and last day of each month). The liability must reflect when the income subject to withholding was paid, not when the deposit was made.
- Combine Chapter 3 and Chapter 4 liabilities as directed in the Form 1042 2020 instructions.
- Never enter negative amounts. Each month’s total should match the amounts carried forward to Lines 64b through 64d.
- Review all entries to confirm that the monthly totals reconcile with your deposits made through EFTPS.
This section establishes the foundation for accurate reporting and ensures the IRS can verify the total tax withheld during the tax year.
Step 4 – Section 2: Reconciliation of Payments
This part reconciles your Form 1042 with Form 1042-S submitted for each payee.
- Verify that the total gross income, tax withheld, and any reduced rates due to income tax treaties match between both forms.
- Include all payments, even when no tax was withheld because of treaty benefits or effectively connected income.
- Resolve differences by reviewing income codes, reporting periods, and recipient details.
- Record reconciliation records to demonstrate compliance with the Internal Revenue Code during an IRS review.
Step 5 – Sections 3 and 4 (If Applicable)
- Section 3 – 871(m) Transactions: Report dividend-equivalent withholdable payments related to equity-linked instruments. Maintain supporting records that show how amounts were calculated and adjusted.
- Section 4 – Qualified Intermediary (QI) Acting as a Qualified Derivatives Dealer (QDD): Complete this part if you act as a QDD. You must attach Schedule Q (Form 1042) to report related liabilities. Partnerships should also confirm their partnership withholding tax obligations and reconcile totals with their information returns.
Step 6 – Compute Tax Due or Overpayment
The final section determines whether you owe unpaid tax or have a credit balance.
- Use Lines 64a through 71 to calculate your total tax liability, subtracting all deposits made and applying any prior-year overpayments.
- If you owe additional tax, submit the payment immediately through EFTPS to avoid penalties and late filing interest.
- If you have an overpayment, specify whether you want it refunded or credited to the next tax year.
- Sign and date the form before submission. Ensure that your filing method—paper or electronic—matches the IRS 2020 submission rules.
Filing and Submission Details
The Form 1042 2020 instructions explain how and when withholding agents must submit their annual withholding tax return to the Internal Revenue Service (IRS). Accurate filing ensures compliance, prevents penalties, and maintains proper reporting of all U.S. source income.
Filing Deadlines and Methods
The filing deadline for Form 1042 for tax year 2020 was March 15, 2021. Withholding agents must file even if no tax was withheld, as long as a Form 1042-S was issued.
- Paper Filing: Mail the completed return to the IRS at P.O. Box 409101, Ogden, UT 84409, including all required attachments such as Form 1042-S, Form 1042-T, and Schedule Q.
- Electronic Filing: The IRS recommends filing electronically through the FIRE system for faster processing and confirmation.
Always ensure totals on Form 1042 match all attached Forms 1042-S to avoid processing delays or notices.
Extensions and Amended Returns
- Extension: File Form 7004 before the due date to extend filing time, but all tax liability must still be paid by March 15.
- Amended Return: If errors occur, check the “Amended Return” box, correct all figures, include updated Forms 1042-S, and keep both versions for IRS verification.
Payment and Deposit Requirements
The Form 1042 2020 instructions require withholding agents to deposit all tax withheld using the Electronic Federal Tax Payment System (EFTPS). The IRS no longer accepts paper checks for these payments, and failure to use EFTPS can result in a 10% penalty. Understanding your payment schedule and deposit rules helps ensure timely compliance and prevents late payment charges.
Using the Electronic Federal Tax Payment System (EFTPS)
The EFTPS is the mandatory system for making federal tax deposits.
- Enrollment: You can enroll online at EFTPS.gov or by calling 800-555-4477. Enrollment may take several days, so it’s essential to register before your first deposit is due.
- Deposit Timing: Deposits must be made by 8 p.m. Eastern Time the day before the due date. Payments made after this time are considered late.
- Compliance: Always confirm that your deposits match the amounts reported on Form 1042 and that each payment is designated for the correct calendar year.
Deposit Frequency and Thresholds
Deposit frequency depends on the total undeposited tax amount at the end of each period:
Deposit Deadlines Based on Undeposited Tax Amount
Undeposited Tax Amount: $2,000 or More
- Deposit Deadline: Within three business days after the quarter-monthly period ends
Undeposited Tax Amount: $200 to $1,999
- Deposit Deadline: Within 15 days after the end of the month
Undeposited Tax Amount: Less Than $200
- Deposit Deadline: Pay with Form 1042 by March 15
Same-Day Wire Payment Option
If you miss the EFTPS deadline, you can make a same-day wire payment using the Federal Tax Collection Service (FTCS). Contact your financial institution to confirm participation, cutoff times, and applicable fees.
Designate the payment as Form 1042 – U.S. Source Income of Foreign Persons to ensure it is applied correctly. Following these payment rules ensures withholding agents meet all IRS deposit requirements and avoid penalties for untimely or incorrect payments.
Required Attachments and Schedules
When filing Form 1042, withholding agents must include all supporting schedules and documents that show how the tax withheld and income paid were calculated. These attachments help the Internal Revenue Service (IRS) confirm that filings accurately reflect payments to foreign persons and comply with the same rules that apply to U.S. taxpayers. Submitting complete materials ensures you are timely in paying and reporting information correctly.
Form 1042-S
Each Form 1042-S reports payments to a beneficial owner, such as a foreign individual, corporation, or trust. This separate form must include details like interest paid, dividends, or other U.S. source income for each recipient and income type.
Form 1042-T and Schedule Q
When filing paper copies, include Form 1042-T, which summarizes all Forms 1042-S and confirms totals match your Form 1042. Qualified Derivatives Dealers (QDDs) must also attach Schedule Q (Form 1042) to report derivatives-related liabilities.
Additional Documentation
Support evidence for real property interests, net income adjustments, or treaty-based exemptions. Include all appropriate documentation to verify accuracy and ensure the IRS can confirm that you report payments in full compliance with federal requirements.
Common Mistakes to Avoid
Even experienced withholding agents can make errors when filing Form 1042. Awareness of these common issues helps ensure accurate reporting, compliance with IRS rules, and timely processing.
- Reporting and Filing Errors
A frequent mistake is omitting Chapter 3 or Chapter 4 status codes, which are required. Some filers also report deposits instead of actual tax liability, leading to mismatches between Form 1042 and Forms 1042-S. Always review the IRS instructions carefully to confirm where withholding applies and how to enter totals correctly.
- Payment and Timing Errors
Missed EFTPS deadlines and untimely payments are among the most common causes of penalties. Ensure you pay all withheld amounts promptly and verify that payments are credited to the correct tax year.
- Documentation and Compliance Issues
In certain circumstances, filers fail to include necessary attachments such as Form 1042-S or Schedule Q. Missing documentation often delays processing or triggers correction requests.
By double-checking each section, confirming totals, and attaching all required forms, withholding agents can avoid costly mistakes and maintain compliance with federal tax reporting standards.
Zero Activity and Dormant Year Rules
The Form 1042 2020 instructions explain that withholding agents must determine whether a return is required yearly, even when little or no activity occurs. Filing correctly for zero-activity years maintains compliance and prevents potential penalties.
When Filing Is Not Required
You do not need to file Form 1042 if no U.S. source income of foreign persons was paid during the year and no Forms 1042-S were issued. This applies when no amounts are subject to withholding under Chapter 3 or Chapter 4 (FATCA).
When Filing Is Still Required
If you issued Form 1042-S, you must file Form 1042, even if no tax was withheld. This includes payments exempt under an income tax treaty or classified as effectively connected income.
Dormant Entities
Qualified Intermediaries (QIs), withholding foreign partnerships (WPs), and withholding foreign trusts (WTs) with no current-year transactions should confirm their obligations under IRS agreements. Some dormant entities must still report zero activity to maintain an active status.
Even in inactive years, filing accurately demonstrates favorable standing with the Internal Revenue Service and ensures continued compliance with federal withholding requirements.
First-Time Filer Guidance
Filing Form 1042 for the first time can seem complex, especially for withholding agents handling payments to foreign persons or foreign entities. Understanding the basic requirements before filing helps ensure accuracy and compliance with Internal Revenue Service (IRS) rules.
- Preparation Steps
Before filing, obtain the correct Employer Identification Number (EIN) or program-specific number (QI-EIN, WP-EIN, or WT-EIN). Enroll in the Electronic Federal Tax Payment System (EFTPS) early to make timely deposits. Review Publication 515 and the Form 1042 2020 instructions to understand which payments are subject to withholding and how to classify your recipients.
- Determining Your Status
Identify whether you are a withholding agent, qualified intermediary (QI), non-qualified intermediary (NQI), or foreign financial institution (FFI). Your classification determines which withholding rules apply and what supporting forms—such as W-8BEN or W-9—you must collect from payees.
- Common First-Time Challenges
New filers often confuse tax liability with deposits or fail to reconcile totals between Form 1042 and Form 1042-S. Establish a recordkeeping system and verify that every income code and payment type aligns across all filings.
Following these steps helps first-time filers avoid common mistakes and meet all IRS reporting requirements efficiently.
Chapter 3 vs. Chapter 4 (FATCA) Withholding Explained
The Form 1042 2020 instructions separate withholding under Chapters 3 and 4 (FATCA) of the Internal Revenue Code. Both apply to U.S. source income paid to foreign persons, but each serves a distinct purpose.
Chapter 3 vs. Chapter 4 Withholding: Key Differences
Legal Basis
- Chapter 3 – Withholding on U.S. Source Income: IRC §§1441–1443
- Chapter 4 – FATCA Withholding: IRC §§1471–1474
Primary Focus
- Chapter 3: Applies to payments made to foreign persons, such as interest, dividends, and royalties
- Chapter 4: Focuses on identifying foreign financial institutions (FFIs) and nonfinancial foreign entities (NFFEs)
Default Withholding Rate
- Chapter 3: 30%, subject to reduction under applicable income tax treaties
- Chapter 4: 30%, with no treaty benefits available
Purpose
- Chapter 3: Ensures collection of U.S. tax on U.S.-source income paid to foreign persons
- Chapter 4: Enforces compliance with FATCA reporting and disclosure requirements
If both apply, Chapter 4 withholding takes precedence and can be credited toward Chapter 3 liability when reporting withholdable payments.
Recordkeeping and Compliance Tips
Proper recordkeeping is critical for every withholding agent filing Form 1042. The Form 1042 2020 instructions recommend maintaining organized and accurate documentation to support all amounts reported and payments made.
- Retention Period: Keep all filed forms, including Form 1042, Forms 1042-S, Form 1042-T, and Schedule Q, for at least four years after the filing due date.
- Payment Proof: Retain Electronic Federal Tax Payment System (EFTPS) confirmations for every deposit.
- Documentation: Maintain records verifying foreign status, treaty benefits, income codes, and withholdable payments.
- Reconciliation: Compare monthly deposits to reported tax liability and ensure totals on Form 1042 align with all Forms 1042-S.
- Compliance Review: Conduct periodic checks to confirm filings meet all Internal Revenue Service (IRS) requirements.
Following these practices helps withholding agents stay compliant, avoid penalties, and simplify future audits or corrections.
Frequently Asked Questions (FAQs)
Do I need to file Form 1042 if no tax was withheld?
You must still file Form 1042 if any Form 1042-S was issued, even if no tax was withheld. The IRS requires the annual return to document all foreign persons' payments of U.S. source income, including those exempt under a tax treaty or classified as effectively connected income with a U.S. trade or business.
Who must file the annual withholding tax return?
Any withholding agent who paid U.S. source income of foreign persons must file Form 1042, even if no tax was withheld. This includes payments to foreign entities, such as corporations or trusts. The form serves as the official tax return for U.S. source income and ensures all payments are appropriately reported to the Internal Revenue Service (IRS).
What happens if there’s a late filing?
A late filing of Form 1042 may result in IRS penalties of 5% of the unpaid tax per month, up to a 25% maximum, plus interest on the balance due. Agents should submit their annual withholding tax return and pay any tax withheld immediately through EFTPS to reduce penalties and demonstrate timely compliance with federal reporting requirements.
How do I correct errors on my tax return for U.S. source income?
If errors are found after submission, file an amended Form 1042. Check the “Amended Return” box and provide corrected information for income paid, tax withheld, and withholding tax liability. Include updated Forms 1042-S to ensure totals match. Retain the original and corrected forms to verify accuracy during any IRS review or reconciliation process.
