Form 1042: A Complete Guide for 2023

What Form 1042 Is For

Form 1042 is an annual tax return that U.S. companies, financial institutions, and other organizations (called ""withholding agents"") must file to report taxes they've withheld from payments made to foreign persons. Think of it as the annual summary report for taxes collected from non-U.S. individuals and entities who received U.S.-sourced income.

If your organization paid certain types of income to foreign persons—including nonresident aliens, foreign partnerships, foreign corporations, foreign estates, or foreign trusts—and withheld U.S. taxes from those payments, you'll need to file Form 1042. This form reports several types of withholding, including taxes withheld under Chapter 3 of the Internal Revenue Code (for traditional foreign person withholding), Chapter 4 taxes under FATCA (Foreign Account Tax Compliance Act), Section 5000C taxes on federal procurement payments, and certain expatriate taxes under Section 877A IRS.gov.

The form works hand-in-hand with Form 1042-S (which provides details about individual recipients and specific payments) and Form 1042-T (which transmits paper Forms 1042-S to the IRS). While Form 1042-S tells the story of each individual payment recipient, Form 1042 provides the big-picture annual summary and reconciliation of all taxes withheld and deposited throughout the year.

Who must file: You must file Form 1042 if you're required to file Form 1042-S (whether or not any tax was actually withheld), if you pay gross investment income to foreign private foundations, if you make federal procurement payments to foreign persons, or if you're a qualified intermediary (QI), withholding foreign partnership (WP), withholding foreign trust (WT), or participating foreign financial institution making a collective refund claim IRS.gov.

When You’d Use Form 1042

Late Filing & Amended Returns

Normal filing deadline: Form 1042 must be filed by March 15, 2024 for the 2023 tax year. This deadline applies whether you file on paper or electronically. If March 15 falls on a Saturday, Sunday, or legal holiday, the due date moves to the next business day IRS.gov.

Extensions: If you need more time, file Form 7004 (Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns) to get an automatic 6-month extension, pushing your deadline to September 15, 2024. However, remember that an extension to file is not an extension to pay—any taxes owed are still due by the original March 15 deadline, and interest will accrue on unpaid amounts even with an approved extension IRS.gov.

Amended returns: If you discover errors after filing your original Form 1042, you'll need to file an amended return. Use the Form 1042 for the year you're correcting, check the ""Amended Return"" box at the top, complete the entire form with corrected information, and attach a detailed statement explaining why you're amending (for example, ""Tax liability for May was incorrectly reported due to a mathematical error""). Important note: Don't file an amended Form 1042 solely to recover taxes that were overwithheld in a prior year—there are separate procedures for adjustments to overwithholding. If you're also correcting the individual recipient forms (Forms 1042-S), follow the amended return procedures in those instructions as well IRS.gov.

Late filing consequences: Missing the deadline can be costly. The IRS will assess interest on any unpaid taxes from the due date forward, and penalties can add up quickly. It's always better to file on time or request an extension than to miss the deadline entirely.

Key Rules or Details for 2023

Electronic filing mandate

For the first time, electronic filing became mandatory for many filers in 2023. You must file Form 1042 electronically if you're a financial institution, if you're required to file 10 or more information returns during the year, or if you're a partnership with more than 100 partners. Only smaller filers meeting none of these criteria can still mail paper returns to the IRS address in Ogden, Utah IRS.gov.

New section 1446(f) withholding

Starting in 2023, brokers handling sales of publicly traded partnership (PTP) interests must withhold tax under Section 1446(f) and report it on Form 1042. If you're a broker who facilitated the sale of a PTP interest for a foreign person, you generally must withhold 10% of the amount realized (unless an exception applies) and report both the amount realized and the withholding on Forms 1042 and 1042-S IRS.gov.

Qualified Derivatives Dealers (QDDs) reporting

If you're a qualified intermediary acting as a QDD, you must complete Schedule Q (Form 1042), which replaced the previous requirement to attach a statement. This schedule provides detailed information about your QDD tax liability related to Section 871(m) transactions IRS.gov.

Chapter 3 and Chapter 4 status codes required

Regardless of what types of payments you're reporting, you must include both your Chapter 3 and Chapter 4 withholding agent status codes. These codes identify your role and classification for both traditional withholding and FATCA purposes IRS.gov.

No double withholding

Remember that you can't withhold under both Chapter 3 and Chapter 4 for the same payment. If withholding is required under both, you may credit the Chapter 4 withholding against your Chapter 3 liability. For payments subject to Section 1445 (real estate) or Section 1446 (partnership income) withholding, Chapter 4 withholding doesn't apply at all IRS.gov.

Step-by-Step (High Level)

Step 1: Gather your documentation

Collect all Forms 1042-S you've prepared for the year, deposit records from EFTPS (Electronic Federal Tax Payment System), payment records for all amounts paid to foreign persons, and documentation supporting your chapter 3 and chapter 4 status codes.

Step 2: Complete the withholding agent identification section

Enter your correct Employer Identification Number (EIN)—or if applicable, your QI-EIN, WP-EIN, or WT-EIN. Include your complete business name and address, and critically important, enter both your Chapter 3 and Chapter 4 status codes from the approved list IRS.gov.

Step 3: Fill out Section 1 (Record of Federal Tax Liability)

Lines 1 through 60 track your tax liability by quarter-monthly periods throughout the year. These lines must show when your tax liability arose (when payments were made), not when you actually deposited money with the IRS. Each quarter-monthly period corresponds to specific date ranges (periods ending on the 7th, 15th, 22nd, and last day of each month). The sum of your monthly totals must match the total liability you report later on the form IRS.gov.

Step 4: Complete Section 2 (Reconciliation of Payments)

This section reconciles the total payments you made with the amounts you reported on Forms 1042-S. You'll need to complete this section even if you didn't withhold any amounts under Chapter 4 (FATCA). This is where reporting errors commonly occur, so double-check that your totals align correctly IRS.gov.

Step 5: Calculate and report your tax liability

Report your total tax liability, separating Chapter 3 liability (line 64b) from Chapter 4 liability (line 64c). Add any adjustments if applicable. The total liability from Section 1 should match these lines.

Step 6: Report deposits and calculate balance due or overpayment

Enter all tax deposits you made during the year through EFTPS. Calculate whether you have a balance due or an overpayment. If you owe money and it's under $200, you can pay it with your return; larger amounts should already have been deposited IRS.gov.

Step 7: Sign, date, and file

An authorized person must sign the return under penalties of perjury. File electronically if you're required to do so, or mail paper returns to the Ogden address. Keep copies of everything for your records.

Step 8: Distribute Forms 1042-S to recipients

Don't forget that foreign persons who received payments must receive their copy of Form 1042-S by March 15 as well (the same deadline as Form 1042) IRS.gov.

Common Mistakes and How to Avoid Them

The IRS has identified recurring errors that delay processing and trigger penalties. Here's how to avoid the most common pitfalls IRS.gov:

Using the wrong EIN

If you're filing as a qualified intermediary, withholding foreign partnership, or withholding foreign trust, you must use your QI-EIN, WP-EIN, or WT-EIN—not your regular EIN. Using the wrong identification number is one of the most frequent errors and can cause serious processing delays.

Confusing liability dates with deposit dates

Section 1 (lines 1–60) must show when your tax liability arose based on when you made payments to foreign persons, not when you deposited money with the IRS. Many filers mistakenly enter their deposit dates and amounts, which throws off the entire reconciliation.

Math errors between sections

The sum of your monthly totals in Section 1 (lines 5, 10, 15, 20, 25, 30, 35, 40, 45, 50, 55, and 60) must exactly match the total tax liability you report on lines 64b, 64c, and 64d. Use a calculator and double-check this calculation.

Including adjustment amounts in the wrong place

If you report adjustments on line 64a (such as repayments under the reimbursement or set-off procedure), do not include those amounts in your Record of Federal Tax Liability (lines 1–60). Adjustments and liabilities are tracked separately.

Missing chapter status codes

You must enter both Chapter 3 and Chapter 4 status codes regardless of the types of payments you're reporting. Some filers incorrectly think they only need one or the other. Both are always required.

Skipping Section 2

Section 2 (Reconciliation of Payments) must be completed even if you didn't withhold any amounts under Chapter 4. Never leave this section blank.

Not reading Publication 515

Many errors stem from unfamiliarity with the rules. Publication 515 (Withholding of Tax on Nonresident Aliens and Foreign Entities) is essential reading and will prevent most common mistakes.

Forgetting electronic filing requirements

Financial institutions and filers with 10+ information returns must file electronically. Paper filing when electronic filing is required will result in penalties.

What Happens After You File

Once you submit Form 1042, several things occur in the IRS processing pipeline:

Processing timeline

The IRS will process your return and match it with the Forms 1042-S you submitted. Electronic returns typically process faster than paper returns. You won't receive an immediate confirmation of acceptance beyond your electronic filing acknowledgment or mail receipt.

Account reconciliation

The IRS compares the tax liability you reported on Form 1042 with your EFTPS deposit records. They verify that deposits were made timely and in the correct amounts. Any discrepancies may trigger correspondence or adjustments.

Matching with Forms 1042-S

The IRS matches the summary information on Form 1042 with the detailed recipient information on all your Forms 1042-S. Mismatches between these forms can flag your account for review.

Refunds or balance due notices

If you overpaid, the IRS will process your refund claim, though this can take several months. If you underpaid or the IRS identifies additional liability, you'll receive a notice with the amount due, including calculated interest and penalties.

Penalty assessments

If the IRS determines you filed late, paid late, or made errors, they'll calculate and assess penalties automatically. You'll receive a notice explaining the penalties and providing information about how to respond if you believe they were assessed in error or if you qualify for reasonable cause relief IRS.gov.

Audit selection

Form 1042 returns are subject to examination just like other tax returns. The IRS may select your return for audit to verify compliance with withholding requirements. If selected, you'll need to provide documentation supporting the amounts reported.

Recipient claims

Foreign persons who received payments may file U.S. tax returns claiming refunds of overwithholding. The IRS will verify these claims against your Form 1042-S filings. Discrepancies may result in IRS inquiries to you as the withholding agent.

Statute of limitations

Generally, the IRS has three years from the filing date to assess additional taxes, though this period can be extended in cases of substantial understatement or fraud. Keep all supporting documentation for at least four years after filing.

FAQs

Q1: What's the difference between Form 1042, Form 1042-S, and Form 1042-T?

Form 1042 is your annual summary tax return showing total taxes withheld and deposited. Form 1042-S is the individual information return for each foreign recipient, similar to a Form 1099 for U.S. persons—you might file dozens or hundreds of Forms 1042-S but only one Form 1042. Form 1042-T is simply a transmittal form used only if you're filing paper Forms 1042-S; it summarizes what you're sending to the IRS. If you file Forms 1042-S electronically (which most people must do now), you don't need Form 1042-T at all IRS.gov.

Q2: I'm a small business that made one payment to a foreign contractor. Do I really need to file Form 1042?

Yes, if you withheld tax or are required to file Form 1042-S, you must also file Form 1042. Even one Form 1042-S triggers the Form 1042 filing requirement. The good news is that if your total undeposited taxes for the year were under $200, you can pay the tax with your Form 1042 rather than making separate deposits. You may also be able to file on paper if you don't meet the electronic filing thresholds IRS.gov.

Q3: What if I didn't withhold any tax because the foreign person provided a Form W-8BEN claiming treaty benefits?

You still need to file Form 1042 and Form 1042-S to report the payment, even though the withholding rate was reduced to zero by treaty. The forms document that the payment was made and that you properly applied the treaty exemption. Section 2 of Form 1042 must be completed even when no actual withholding occurred IRS.gov.

Q4: Can I file Form 1042 on paper, or must I file electronically?

For 2023, electronic filing is mandatory if you're (1) a financial institution, (2) required to file 10 or more information returns during the year, or (3) a partnership with more than 100 partners. If you don't meet any of these criteria, you can still file on paper by mailing to the IRS address in Ogden, Utah. However, electronic filing is generally faster and reduces processing errors IRS.gov.

Q5: I made deposits throughout the year using EFTPS. How do I designate which deposits go with which tax year?

When making deposits through EFTPS, you specify the tax period to which the payment applies. For payments made after December 31, 2023, but relating to 2023 tax liability (for example, a partnership withholding on undistributed income), you must designate the deposit as attributable to 2023 at the time you make it. This designation ensures the IRS credits the deposit to the correct tax year on your Form 1042 IRS.gov.

Q6: What should I do if I discover an error after filing my Form 1042?

File an amended Form 1042 using the form for the year you're correcting. Check the ""Amended Return"" box at the top, complete the entire form with corrected information, sign it, and attach a statement explaining the error and correction. Don't try to fix prior-year errors on your current-year return—always amend the specific year that was incorrect IRS.gov.

Q7: Are there penalties for late filing, and how much are they?

Yes, penalties can be substantial. For late filing, you'll be charged 5% of any unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. For late payment, the penalty is 0.5% of the unpaid tax per month, also capped at 25%. Additionally, interest accrues on both unpaid taxes and penalties from the due date forward. If you can establish reasonable cause for the delay and show it wasn't willful neglect, penalties may be waived, but you'll need to provide documentation supporting your reasonable cause claim IRS.gov.

Additional Resources

For more detailed information, consult these authoritative IRS sources:

Form 1042 and Instructions (IRS.gov)
Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities (IRS.gov)
Instructions for Form 1042-S (IRS.gov)
Discussion of Forms 1042, 1042-S, and 1042-T (IRS.gov)

For technical assistance with Form 1042, call the IRS International Section at 267-941-1000 (not toll-free) from 6:00 a.m. to 11:00 p.m. Eastern time, Monday through Friday.

This guide is based on official IRS guidance for the 2023 tax year. Tax rules change regularly, so always verify current requirements at IRS.gov before filing.