What Form 1042 (2018) Is For
Form 1042 (2018) is the annual withholding tax return that withholding agents must file to report payments of U.S. source income made to foreign individuals. It applies to foreign corporations, foreign partnerships, foreign trusts, and other foreign entities receiving income subject to U.S. withholding tax. This IRS form summarizes gross income paid, tax withheld, and total federal tax liability for the tax year. It also helps verify compliance for financial institutions and withholding agents handling nonresident aliens, foreign branches, or publicly traded partnerships.
When You’d Use Form 1042 (2018)
Withholding agents use Form 1042 to report certain income, such as dividends, royalties, rents, and scholarship or fellowship grants paid to foreign individuals. The due date for the 2018 tax year was March 15, 2019, or the next business day if a legal holiday applied. If the return was filed electronically, it must have matched all reported Forms 1042-S. Late filings were allowed for reasonable cause, not willful neglect, and required full tax paid before approval. Amended returns used the same form, accompanied by an attached explanation, to correct errors.
Key Rules or Details for 2018
- Electronic filing requirement: Certain taxpayers, such as large financial institutions and withholding agents filing over 250 forms, were required to file electronically.
- Deposit rules: When tax liability exceeded $2,000 in a quarter-monthly period, tax must have been deposited through EFTPS within three business days.
- Who must file: Withholding agents, qualified investment entities, publicly traded trusts, and flow-through entities reporting amounts subject to withholding were required to file Form 1042.
- Reporting accuracy: The IRS required withholding agents to report tax withheld and tax deposited in the same tax year to ensure compliance.
- Treaty benefits: Foreign individuals claiming treaty benefits for reduced tax rates had to provide valid documentation, such as Form W-8BEN, to the withholding agent.
- Administrative exemption: Some foreign estates and foreign partnerships qualify for a limited exemption when no withholding payments were made during the preceding calendar year.
Browse more tax form instructions and filing guides in our Forms Hub.
Step-by-Step (High Level)
Step 1: Gather your information
Collect all Forms 1042-S, deposit records, income codes, and documentation of amounts paid to each beneficial owner. Ensure your employer identification number matches the withholding agent’s name listed for tax purposes.
Step 2: Complete the header information
Enter your legal name, EIN, and address. Include your withholding agent’s chapter status under Chapter 3 and Chapter 4. Identify whether you are a foreign branch or a financial institution filing for multiple foreign entities.
Step 3: Record your liability
Use Section 1 to record the federal tax liability for each period. Each entry should represent tax withheld when payments were made, not when deposits occurred, to reflect accurate reporting.
Step 4: Reconcile and verify totals
Section 2 summarizes the gross income, certain income amounts exempt by treaty, and tax paid during the year. The total tax liability must match the total tax deposited as confirmed through EFTPS.
Step 5: Address special items
List eligible deferred compensation items, backup withholding, and amounts paid to nonresident alien employees or foreign partners under central withholding agreements.
Step 6: Sign and file
The withholding agent or authorized officer must sign the form. If you file Form 1042 electronically, confirm that all related Forms 1042-S were submitted on time to the Internal Revenue Service.
Learn more about federal tax filing through our IRS Form Help Center.
Common Mistakes and How to Avoid Them
- Using an incorrect EIN: Always verify the employer identification number on the form to ensure it matches the withholding agent’s name and avoid IRS rejection.
- Reporting deposits instead of liability: Report the tax liability when the payment to a foreign person is made, ensuring accurate totals between the tax withheld and the tax deposited.
- Omitting zero-withholding filings: File Form 1042 even if no tax was withheld during the year, as some payments to foreign persons remain reportable for federal tax liability purposes.
- Ignoring treaty documentation: Review all treaty benefits before filing to confirm the foreign person provided a valid certification and avoid overstating unpaid tax amounts.
- Missing due dates: Mark calendar reminders for March 15 or the next business day after a legal holiday to avoid late filing penalties and interest on unpaid tax.
- Failing to file electronically when required: If you are a financial institution or large filer, file electronically to remain compliant and prevent administrative penalties.
- Not reconciling totals: Verify that amounts paid and tax withheld reconcile with the gross amount on your 1042 annual withholding tax return.
Learn more about how to avoid business tax problems in our guide on How to File and Avoid Penalties.
What Happens After You File
Once you file Form 1042, the IRS compares your reported gross income and tax withholding with all Forms 1042-S and EFTPS records. If discrepancies exist, the Internal Revenue Service may issue correspondence requesting clarification. When the tax paid exceeds the tax liability, the filer may request a refund or credit for the next tax year. If unpaid tax remains, penalties and interest will be applied until the balance is settled. Taxpayers must maintain records of withholding payments and details of their foreign partners' shares for at least three years after filing.
FAQs
What income from foreign individuals is reported on Form 1042 (2018)?
Form 1042 reports U.S. source income paid to foreign individuals, including dividends, rents, royalties, and scholarship or fellowship grants, subject to withholding tax under Chapter 3 or Chapter 4.
What is the due date for the 2018 annual withholding tax return?
The due date was March 15, 2019. When that date fell on a weekend or legal holiday, the next business day became the official due date for filing Form 1042.
How does Form 1042 relate to income tax for foreign individuals?
Form 1042 ensures that U.S. tax obligations for foreign individuals and nonresident aliens are properly withheld and reported for all income of foreign individuals.
Who must file Form 1042 for gross income payments?
Withholding agents, financial institutions, flow-through entities, and publicly traded partnerships must report gross income amounts paid to foreign individuals or entities under U.S. source income rules.
What if federal tax liability is unpaid when filing Form 1042?
If tax liability remains unpaid, penalties for willful neglect may apply. Withholding agents can request relief by demonstrating reasonable cause and promptly depositing the unpaid tax.
How are foreign financial institutions treated under Form 1042 rules?
Foreign financial institutions must comply with FATCA reporting for withheld payments and provide documentation for beneficial owners to confirm eligibility for treaty benefits and reduced withholding tax.
