Form 1042: Annual Withholding Tax Return for U.S. Source Income of Foreign Persons (2017)
What the Form Is For
Form 1042 is the annual tax return that U.S. withholding agents use to report taxes they've withheld from payments made to foreign persons. Think of it as the master summary document for all the taxes you've collected throughout the year when paying foreign individuals and entities.
If your business, organization, or institution makes payments to foreign persons—such as nonresident aliens, foreign partnerships, foreign corporations, foreign estates, or foreign trusts—and those payments come from U.S. sources, you're likely required to withhold a portion for taxes and report it to the IRS using Form 1042.
The form covers several types of withholding situations. Most commonly, it reports tax withheld under Chapter 3 of the tax code on certain income types, including dividends, interest, royalties, scholarships, pensions, and other types of “fixed or determinable annual or periodical” (FDAP) income paid to foreign persons. It also reports tax withheld under Chapter 4 on “withholdable payments” and specified federal procurement payments to foreign contractors under section 5000C.
Form 1042 works hand-in-hand with Form 1042-S. While Form 1042 is the annual return that summarizes all your withholding activity for the year, Form 1042-S is the individual statement you provide to each foreign recipient showing what you paid them and how much you withheld. Think of Form 1042 as the cover letter and Forms 1042-S as the itemized receipts—you file both with the IRS, and you give copies of Form 1042-S to your foreign payees.
Source: IRS.gov
When You’d Use This Form (Including Late and Amended Returns)
Regular Filing Deadline
Form 1042 for the 2017 tax year must be filed by March 15, 2018. This deadline applies regardless of how many Forms 1042-S you're submitting or whether you're filing electronically or on paper. The form should be mailed to the Ogden Service Center in Utah.
Extension Requests
If you need additional time to prepare your return, you can request an automatic extension using Form 7004 (Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns).
This extension provides up to six additional months, moving your deadline to September 15, 2018. However, Form 7004 extends only the time to file—not the time to pay. Any balance due must still be deposited by the original March 15 deadline to avoid interest and penalties.
Amended Returns
If you discover errors after filing your original Form 1042, you must file an amended return immediately. Common reasons include incorrect withholding agent information, errors in tax withheld, or mistakes in reconciliation amounts.
To amend, check the “Amended Return” box at the top of a new Form 1042 and provide corrected information. You should also amend any related Forms 1042-S.
Late Filing
If you miss the deadline without requesting an extension, you face a penalty of 5% of unpaid tax per month (up to 25%). Late payment penalties are typically 0.5% per month (up to 25%).
Source: IRS.gov
Key Rules and Requirements for 2017
Who Must File
You must file Form 1042 if you’re a withholding agent or intermediary who handles payments subject to withholding. This includes QIs, WPs, WTs, participating FFIs, and reporting Model 1 FFIs. Filing Form 1042-S electronically does not eliminate the need to file Form 1042.
New for 2017 — Qualified Derivatives Dealers (QDDs)
The 2017 form introduced new reporting responsibilities for QDDs. QIs acting as QDDs must assume certain withholding and reporting duties for section 871(m) transactions.
Form 1042 now includes a Section 4 for QDDs and modifies Section 3 to apply to all potential section 871(m) payments.
Chapter 3 and 4 Status Codes
Both Chapter 3 and Chapter 4 status codes are required for all withholding agents, even if only one type of payment is reported.
Mandatory Section 2: Reconciliation of U.S. Source FDAP Income
Section 2 is now mandatory for all filers. For 2017, fields for excluded payments on offshore obligations and collateral were removed.
Electronic Deposit Requirement
All tax deposits must be made electronically via EFTPS. Failure to do so can result in a 10% penalty.
Deposit timing:
- $2,000+ in undeposited taxes → deposit within 3 business days.
- $200–$1,999 → deposit within 15 days.
Source: IRS.gov
Step-by-Step Filing Process (High Level)
Step 1: Gather Documentation
Collect all Forms 1042-S for each foreign recipient, including totals, gross payments, and taxes withheld.
Step 2: Obtain or Verify Your EIN
Ensure you have the correct EIN. QIs, WPs, and WTs must use their specialized EINs. Apply using Form SS-4 if needed.
Step 3: Complete Withholding Agent Information
Enter your name, address, EIN, and both Chapter 3 and 4 status codes.
Step 4: Fill Out Section 1 (Record of Federal Tax Liability)
Report tax liability for each quarter-monthly period (lines 1–60). This reflects when liability occurred, not when deposits were made.
Step 5: Complete Section 2 (Reconciliation)
Enter all gross amounts from Forms 1042-S and reconcile with withholding and deposits.
Step 6: Report Withholding and Adjustments
Use lines 63a–63d for withholding and any adjustments for over- or underwithholding.
Step 7: Calculate Total Liability and Balance Due
Report total tax liability by chapter (lines 64a–64d), deposits (lines 65a–65b), credits (line 66), and determine balance due or overpayment.
Step 8: File by Deadline
Mail Form 1042 to the Ogden Service Center by March 15, 2018, and use Form 1042-T for paper 1042-S forms.
Source: IRS.gov
Common Mistakes and How to Avoid Them
Mistake #1: Incorrect or Missing EIN
Use the correct specialized EIN (QI-EIN, WP-EIN, or WT-EIN).
Mistake #2: Missing Chapter 3 and 4 Status Codes
Both codes are required regardless of payment type.
Mistake #3: Mismatched Totals Between Forms
Ensure totals on Form 1042 match all Forms 1042-S.
Mistake #4: Reporting Deposits Instead of Liability
Section 1 reports liability, not deposits.
Mistake #5: Failing to Complete Section 2
Section 2 is mandatory as of 2017.
Mistake #6: Improper Over/Underwithholding Adjustments
Report corrections on line 63c following proper procedures.
Mistake #7: Negative Amounts on Lines 1–60
Form 1042 does not allow negative liabilities. Adjust via earlier periods or proper lines.
Source: IRS.gov
What Happens After You File
Processing Timeline
IRS processes returns in a few weeks to months, verifying reconciliation and deposit accuracy.
Balance Due
Unpaid amounts accrue interest under section 6621 from the due date. Expect an IRS bill for tax, interest, and penalties.
Overpayment or Refund
You may request a refund or apply overpayment to the next year. Special procedures apply for QIs, WPs, WTs, and FFIs.
IRS Correspondence
If issues arise, the IRS will send a notice. Respond promptly to avoid penalties.
Record Retention
Keep all supporting records for three years (or two years from payment date, whichever is later).
Recipient Copies
Provide Forms 1042-S to foreign recipients by March 15 each year.
Source: IRS.gov
FAQs
Q1: Do I need to file Form 1042 if I didn’t withhold any taxes?
Yes. You must file Form 1042 if you filed or were required to file Forms 1042-S, even if no tax was withheld.
Q2: Can I file Form 1042 electronically?
Electronic filing was available in 2017 but not mandatory. Filers of 250+ Forms 1042-S must file those electronically.
Q3: What’s the difference between Form 1042 and Form 1042-S?
Form 1042 summarizes annual withholding; Form 1042-S provides itemized statements for each foreign recipient.
Q4: I made a payment in December 2017 but withheld in January 2018—what year do I report?
Report in the year you actually withheld (2018). See the form instructions for exceptions.
Q5: What if I’m both a QI and NQI?
File separate Forms 1042 for each capacity using the appropriate status codes.
Q6: How do I correct errors after filing?
File corrected Forms 1042-S and an amended Form 1042 immediately.
Q7: Do penalties apply even if no taxes were owed?
Yes. Penalties can still apply for late information returns (Forms 1042-S), even if no tax was owed.
Source: IRS.gov
For More Information
Visit IRS.gov/Form1042 for the latest updates.
You can also download Publication 515, “Withholding of Tax on Nonresident Aliens and Foreign Entities,” or contact the IRS International Section at 267-941-1000 (6:00 a.m.–11:00 p.m. ET).
