What the Form Is For

Form 1042 is the annual tax return that withholding agents file to report taxes they withheld from payments made to foreign persons. Think of it as a year-end summary that accounts for money held back from payments to foreign individuals, companies, trusts, or other entities who received U.S.-source income.

A withholding agent can be any person or business required to withhold tax—whether you're an individual, corporation, partnership, trust, estate, government agency, or even a foreign entity. If you control, pay, or dispose of certain types of income going to foreign recipients, you're likely a withholding agent.

The 2014 version of Form 1042 was significantly updated to incorporate the Foreign Account Tax Compliance Act (FATCA), also known as Chapter 4 of the tax code. This meant withholding agents had to report not only traditional Chapter 3 withholding (on fixed or determinable annual or periodical income, or FDAP), but also new Chapter 4 withholding on "withholdable payments" under FATCA regulations that took effect July 1, 2014.

You must file Form 1042 if you're required to file Form 1042-S (the individual recipient statement), if you withheld tax under Chapters 3 or 4, if you pay gross investment income to foreign private foundations subject to tax, or if you're a qualified intermediary, withholding foreign partnership, or participating foreign financial institution making a collective refund claim IRS.gov.

When You'd Use It (Regular, Late, and Amended Filings)

Regular Filing

Form 1042 for the 2014 calendar year was due by March 16, 2015. The form must be mailed to the Ogden Service Center in Utah, regardless of whether you filed the accompanying Forms 1042-S electronically or on paper.

Extension

If you needed more time, you could file Form 7004 to request an automatic extension. However, this extension only gave you more time to file the paperwork—not more time to pay any tax you owed. Any balance due still needed to be paid by the original March 16 deadline to avoid penalties and interest.

Late Filing

If you missed the deadline without filing for an extension, you'd face a penalty of 5% of the unpaid tax for each month (or part of a month) the return was late, up to a maximum of 25%. Interest would also accrue on unpaid taxes from the original due date.

Amended Returns

If you discovered errors after filing your original Form 1042, you'd need to file an amended return using a 2014 Form 1042 with the "Amended Return" box checked at the top. You must complete the entire form again with corrected information and attach a statement explaining why you're filing the amendment. Amended returns filed more than 30 days after the due date but by August 1 could face a $60 penalty per form IRS.gov.

Key Rules for 2014

• FATCA Integration: The most significant change for 2014 was the incorporation of FATCA (Chapter 4) reporting. The form added separate lines for Chapter 3 and Chapter 4 tax liabilities, separate status codes for different types of withholding agents, and a reconciliation section for U.S. source FDAP income that qualifies as withholdable payments under Chapter 4.
• Electronic Filing Mandate: Financial institutions and anyone filing 250 or more Forms 1042-S were required to file them electronically. This was a critical compliance requirement, as paper filing when electronic filing was mandatory could result in penalties.
• Deposit Requirements: All withholding agents had to use the Electronic Federal Tax Payment System (EFTPS) to deposit withheld taxes. The timing depended on the amount: if you had $2,000 or more in undeposited taxes at the end of any quarter-monthly period (the 7th, 15th, 22nd, or last day of the month), you had to deposit within 3 business days. If you had between $200 and $2,000 at month's end, you had 15 days to deposit.
• No Double Withholding: An important clarification—withholding wasn't required under both Chapters 3 and 4 for the same payment. If withholding applied under both chapters, you could credit Chapter 4 withholding against Chapter 3 liability.
• Publicly Traded Partnerships: For 2014, publicly traded partnerships had a new reporting obligation—they had to withhold Section 1446 tax on distributions of effectively connected income to foreign partners and report it on Form 1042 IRS.gov.

Step-by-Step Filing Process (High Level)

Step 1: Gather Your Forms 1042-S

Throughout 2014, you should have been issuing Forms 1042-S to each foreign recipient showing their income and tax withheld. These forms are the foundation of your Form 1042.

Step 2: Obtain Your EIN

You need an Employer Identification Number (EIN) to file. If you're a qualified intermediary, withholding foreign partnership, or withholding foreign trust, you need a special QI-EIN, WP-EIN, or WT-EIN. Don't use your regular EIN if you need one of these special identifiers.

Step 3: Complete Your Status Codes

Identify your Chapter 3 and Chapter 4 withholding agent status using the correct codes (such as qualified intermediary, participating FFI, nonqualified intermediary, etc.).

Step 4: Report Your Tax Liability

Lines 1 through 60 break down your monthly tax liability by quarter-monthly periods. Enter the tax liability for each period when income was paid or distributed, regardless of whether it was Chapter 3 or Chapter 4 withholding.

Step 5: Reconcile Gross Amounts

Report the total gross amounts paid (from all your Forms 1042-S) in Section 2, breaking down U.S. source FDAP income, substitute dividend payments, and other categories.

Step 6: Calculate Your Balance

Report total deposits made during the year, any overpayments from the previous year you're applying as a credit, and any credits for amounts other withholding agents withheld on your behalf. The form will calculate whether you owe additional tax or have an overpayment.

Step 7: Choose Refund or Credit

If you overpaid, decide whether to receive a refund or apply the overpayment as a credit toward your 2015 tax liability.

Step 8: File by the Deadline

Mail the completed form to the IRS Ogden Service Center by March 16, 2015, and use Form 1042-T to transmit any paper Forms 1042-S IRS.gov.

Common Mistakes and How to Avoid Them

Mistake #1: Filing Paper Forms When Electronic Filing Is Required

If you're a financial institution or filed 250 or more Forms 1042-S, you were required to file electronically. Filing on paper would result in penalties. Solution: Count your forms early in the process and enroll in the IRS FIRE System well before the deadline.

Mistake #2: Missing Deposit Deadlines

Many withholding agents incorrectly calculate when deposits are due, leading to late-payment penalties of 0.5% per month (up to 25%) plus interest. Solution: Track your undeposited tax carefully throughout the year and use EFTPS, remembering to initiate deposits by 8 p.m. Eastern time the day before the deadline.

Mistake #3: Failing to Reconcile Forms 1042-S with Form 1042

The gross amounts on your Form 1042 should match the totals from all your Forms 1042-S. Mismatches trigger IRS correspondence and delays. Solution: Before filing, add up box 2 amounts from all Forms 1042-S and verify they equal line 62c on Form 1042.

Mistake #4: Incorrect Handling of Overwithholding

If you discover you overwithheld, the rules depend on when you catch it. Many taxpayers incorrectly adjust prior-year returns instead of following the proper reimbursement or set-off procedures. Solution: If you discover overwithholding by March 15, 2015, use undeposited funds to repay the recipient and report the reduced liability. If discovered later, use the reimbursement procedure (repaying from your own funds) or the set-off procedure (reducing future withholding).

Mistake #5: Using the Wrong EIN

Qualified intermediaries must use their QI-EIN, not their regular EIN. Foreign financial institutions with a Global Intermediary Identification Number (GIIN) for Chapter 4 still need an EIN to file Form 1042. Solution: Verify you have the correct type of EIN for your withholding agent status before filing.

Mistake #6: Reporting Tax Liability on the Wrong Line

Lines 1–60 break down liability by specific date ranges. Many filers put everything on one line. Solution: Match each tax liability to the specific quarter-monthly period when the income was actually paid or distributed.

Mistake #7: Not Attaching Supporting Documentation

If you claim credits on line 67 for taxes withheld by other withholding agents, you must attach the Forms 1042-S issued to you as proof. Solution: Keep copies of all Forms 1042-S you receive and attach them to your Form 1042 when claiming credits IRS.gov.

What Happens After You File

Immediate Processing

The IRS processes your Form 1042 at the Ogden Service Center, reconciling your reported amounts with the Forms 1042-S you submitted. They verify that your total tax withheld matches the sum of individual recipient statements.

Notice of Overpayment or Balance Due

If your return shows an overpayment and you requested a refund, the IRS will process the refund after verifying your information. This typically takes several weeks to several months. If you owe additional tax, you should have paid it by the March 16 deadline; otherwise, the IRS will send you a bill including interest and penalties.

Penalty and Interest Calculations

If you filed late or paid late, the IRS will calculate the penalties and interest owed and send you a notice. You don't need to calculate these yourself—the IRS does it automatically based on Section 6621 interest rates.

Potential Examination

The IRS may select your return for examination, particularly if there are inconsistencies between your Form 1042 and the supporting Forms 1042-S, if you're a first-time filer, or if you're in a high-risk category (such as a qualified intermediary or participating FFI).

Liability for Your Withholding Agent Role

Remember that as a withholding agent, you remain personally liable for any tax you failed to withhold, plus interest and penalties. Even if you file Form 1042 correctly, if you didn't withhold the proper amount, you can be held responsible. If the foreign person later pays their U.S. tax liability, you're relieved of the tax itself but may still owe penalties and interest.

Record Retention

You should keep copies of your Form 1042, all supporting Forms 1042-S, and deposit records for at least four years from the filing date. These records may be needed if the IRS has questions or if you need to file an amended return IRS.gov.

FAQs

Q1: Do I need to file Form 1042 if I didn't withhold any tax?

Yes, if you filed Forms 1042-S for Chapter 3 or Chapter 4 purposes, you must file Form 1042 even if no tax was withheld. The form serves as a summary of all reportable payments, not just those with withholding.

Q2: What's the difference between Chapter 3 and Chapter 4 withholding?

Chapter 3 refers to traditional withholding on FDAP income paid to foreign persons under Sections 1441, 1442, and 1443. Chapter 4 (FATCA) refers to the 30% withholding on "withholdable payments" to foreign financial institutions and other entities that don't comply with FATCA documentation requirements. Both are reported on the same Form 1042 for 2014, but on separate lines.

Q3: Can I file Form 1042 electronically?

No. Form 1042 itself must be filed on paper and mailed to the IRS. However, Forms 1042-S (the recipient statements) can—and in many cases must—be filed electronically through the IRS FIRE System.

Q4: What if I discover an error after the March 16 deadline but before I file?

File your Form 1042 correctly with the accurate information. You don't need to file an amended return if you haven't filed an original return yet—just file once with the correct information.

Q5: I'm a qualified intermediary. Do I report amounts withheld by U.S. withholding agents?

If you assumed primary withholding responsibility under Chapters 3 and 4, report your tax liability on the appropriate lines 1–60. If you didn't assume primary withholding responsibility, report the total U.S. withholding agents' tax liability on line 59. You can claim credits on line 67 for amounts other withholding agents withheld on your behalf, but you must attach supporting Forms 1042-S.

Q6: How do I handle corporate distributions if I estimated earnings and profits?

If you made a reasonable estimate of earnings and profits under the regulations and later discovered you underwithheld, don't include that adjustment on lines 1–60 if you paid the underwithheld amount by March 16, 2015. Instead, report it on line 64a as an adjustment for corporate distributions.

Q7: What forms are related to Form 1042?

Form 1042-S is the individual recipient statement showing what you paid to each foreign person and how much you withheld. You must give each recipient their Form 1042-S by March 15, 2015. Form 1042-T is the transmittal form used when you file paper Forms 1042-S (you include it in the envelope with the Forms 1042-S). You file Form 1042-T along with Form 1042, even if you filed Forms 1042-S electronically—just indicate on Form 1042-T that you filed electronically IRS.gov.

For More Information

Visit IRS.gov/Form1042 or call the IRS International Section at 267-941-1000 (not toll-free) from 6:00 a.m. to 11:00 p.m. Eastern time. You can also write to: Internal Revenue Service, International Section, Philadelphia, PA 19255-0725.