Form 1042: Annual Withholding Tax Return for U.S. Source Income of Foreign Persons (2020)

If you're a business, financial institution, or individual who pays certain types of income to foreign persons, you may need to file Form 1042. This guide breaks down everything you need to know about the 2020 version of this form in plain English, based on official guidance from the Internal Revenue Service.

What Form 1042 Is For

Form 1042 is essentially the IRS's way of tracking and collecting taxes on U.S.-source income paid to foreign individuals and entities. Think of it as an annual report card that tells the government how much money you paid to foreigners and how much tax you withheld from those payments.

The form reports several types of tax withholding including tax withheld under Chapter 3 of the Internal Revenue Code (which covers traditional withholding on payments to nonresident aliens, foreign partnerships, corporations, estates, and trusts), tax withheld under Chapter 4 (commonly known as FATCA or the Foreign Account Tax Compliance Act, which applies to "withholdable payments"), tax on specified federal procurement payments under Section 5000C, and certain tax on payments to covered expatriates under Section 877A.

Who Must File

Who must file? You're required to file Form 1042 if you're a "withholding agent"—which is a broad term covering individuals, trusts, estates, partnerships, corporations, nominees, government agencies, or tax-exempt organizations (both domestic and foreign) that control, pay, or dispose of income subject to withholding. Common filers include banks processing wire transfers to foreign accounts, universities paying stipends to international students or scholars, companies paying dividends to foreign shareholders, brokers managing investments for foreign clients, and any business making payments to foreign contractors or service providers. IRS Form 1042 Instructions

Even if no tax was actually withheld, you must still file Form 1042 if you're required to file or do file Forms 1042-S (the individual recipient statements), if you pay gross investment income to foreign private foundations subject to tax, or if you're certain types of intermediaries making collective refund claims.

When You’d Use Form 1042

Due Dates, Late Filing, and Amended Returns

Standard Due Date

For the 2020 tax year, Form 1042 was due by March 15, 2021. This deadline is fixed—Form 1042 is always due by March 15 of the year following the calendar year for which you're reporting.

Extensions

If you need more time, you can request an automatic 6-month extension by filing Form 7004 (Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns) before the March 15 deadline. This extends your filing deadline to September 15, 2021, for the 2020 form. However, the extension only applies to filing the form—it does not extend the time to pay any taxes due. You still must deposit all withheld taxes by the original due date to avoid penalties. IRS Form 1042 Instructions

Late Filing

If you miss the deadline without obtaining an extension, expect consequences. The IRS imposes a penalty of 5% of the unpaid tax for each month (or part of a month) the return is late, up to a maximum of 25% of the unpaid tax. Additionally, there's a late payment penalty of 0.5% of the unpaid tax per month (up to 25%), plus interest charges calculated at rates determined under Section 6621 of the tax code.

Amended Returns

Mistakes happen. If you discover errors after filing, you can file an amended Form 1042 by checking the "Amended Return" box on a new Form 1042 for the year you're correcting. Attach a detailed explanation of what you're changing and why. The IRS recommends filing amended returns as soon as possible after discovering errors. For changes to individual Forms 1042-S (the recipient statements), refer to the Form 1042-S instructions for specific amended return procedures. IRS Form 1042 Instructions

Key Rules or Details for 2020

Electronic Filing Requirement

For tax year 2020, if you filed 10 or more Forms 1042-S, you were required to file them electronically. However, Form 1042 itself could still be filed on paper by mailing it to: Internal Revenue Service, P.O. Box 409101, Ogden, UT 84409.

Electronic Deposit Mandate

All tax deposits must be made electronically through the Electronic Federal Tax Payment System (EFTPS), regardless of the amount. Failure to use EFTPS can result in a 10% penalty. This requirement existed before 2020 but remains critical—the IRS does not accept mailed deposits.

Deposit Timing Rules

The frequency of required deposits depends on the amount of tax withheld. If you accumulate $2,000 or more in undeposited taxes by the end of any quarter-monthly period (the 7th, 15th, 22nd, or last day of the month), you must deposit within 3 business days. If you have at least $200 but less than $2,000 at month-end, deposit within 15 days after month-end. If you have less than $200 at year-end, you can either deposit by March 15 or pay with your Form 1042.

Schedule Q Requirement

A new requirement for 2020 was that Qualified Derivatives Dealers (QDDs) must attach Schedule Q (Form 1042) to report tax liability. This replaced the previous statement requirement and provides more structured reporting.

Proposed Regulations Relief

The IRS allowed withholding agents to rely on certain proposed regulations issued in December 2018 that reduced burden under FATCA and Chapter 3. Notably, partnerships and trusts could withhold in a subsequent year on a foreign partner's or beneficiary's undistributed share of income and designate the deposit as attributable to the preceding year. IRS Form 1042 Instructions

Rounding Rule

The 2020 instructions required all amounts to be rounded to whole dollars (drop amounts under 50 cents, round up amounts from 50–99 cents).

COVID-19 Considerations

While not specific to Form 1042's structure, 2020 was affected by pandemic-related IRS operational changes, though the March 15, 2021 deadline remained firm.

Step-by-Step (High Level)

Filing Form 1042 involves several major steps:

Step 1: Gather Information and Documentation

Collect all payment records for the calendar year, including dates, amounts paid to each foreign recipient, tax withheld from each payment, and recipient documentation (Forms W-8BEN, W-8BEN-E, W-8ECI, etc.). You'll also need your Employer Identification Number (EIN) or, if you're a Qualified Intermediary, Withholding Foreign Partnership, or Withholding Foreign Trust, your QI-EIN, WP-EIN, or WT-EIN.

Step 2: Complete Forms 1042-S

Before tackling Form 1042, prepare a Form 1042-S for each recipient of income subject to withholding. These individual statements detail what you paid each foreign person and how much you withheld. Form 1042 summarizes all these individual Forms 1042-S.

Step 3: Fill Out Basic Information (Top of Form 1042)

Enter your name, address, and correct EIN. Critically, enter your Chapter 3 and Chapter 4 status codes—these codes identify your role (such as U.S. withholding agent, qualified intermediary, participating FFI, etc.) and are required regardless of which types of payments you made.

Step 4: Complete Section 1—Record of Federal Tax Liability (Lines 1–60)

This section tracks when you incurred tax liability during the year, broken down by quarter-monthly periods. Enter the tax liability for each period when income was paid or distributed—not when you deposited taxes. Important: Report liability here, not deposits. The sum of monthly totals must match your total tax liability reported later.

Step 5: Complete Section 2—Reconciliation of Payments (Lines 61–63)

Report total gross income paid (line 61), gross income subject to withholding (line 62), and any adjustments for overwithholding (line 63). This section reconciles what you paid out with what should have been withheld.

Step 6: Complete Section 3—Computation of Tax Due or Overpayment (Lines 64–71)

Calculate total tax liability (separating Chapter 3 and Chapter 4 amounts), report deposits made during and after the calendar year, calculate any balance due or overpayment, and indicate whether you want an overpayment refunded or credited to next year.

Step 7: Attach Required Documents

Include Schedule Q if you're a QDD, any required explanatory statements, and Form 7004 if you're filing under extension.

Step 8: Sign, Date, and File

An authorized person must sign under penalties of perjury. Mail to the IRS address in Ogden, Utah, by March 15 of the following year. IRS Form 1042 Instructions

Common Mistakes and How to Avoid Them

The IRS identified several frequent errors that delay processing or trigger penalties:

Mistake 1: Wrong or Missing EIN

Using an incorrect Employer Identification Number is one of the most common errors. If you're a Qualified Intermediary, make sure you use your QI-EIN, not your regular EIN. Double-check every digit before submitting.

Mistake 2: Missing Chapter 3 and 4 Status Codes

These codes are mandatory on every Form 1042, regardless of payment types. Leaving them blank will cause processing delays. Review the status code list in the Form 1042-S instructions and choose the most specific code for your situation.

Mistake 3: Mismatch Between Record of Tax Liability and Total Tax Liability

The sum of lines 5, 10, 15, 20, 25, 30, 35, 40, 45, 50, 55, and 60 (your monthly totals in Section 1) must exactly equal the amounts on lines 64b, 64c, and 64d. If these don't match, the IRS will reject or question your return.

Mistake 4: Reporting Deposits Instead of Liability in Lines 1–60

Section 1 asks for your tax liability by period—when you owed the tax based on when payments were made—not when you actually deposited money with the IRS. Many filers confuse these and report deposit dates instead of liability dates.

Mistake 5: Including Adjustments in the Wrong Place

Adjustments for overwithholding reported on line 64a should not be included in your Record of Federal Tax Liability (lines 1–60). Keep these separate or your totals won't reconcile.

Mistake 6: Failing to Complete Section 2

Even if you didn't withhold any tax under Chapter 4, you must still complete Section 2 (Reconciliation of Payments). Leaving it blank is an error.

Mistake 7: Not Filing When Required

Some withholding agents mistakenly believe that if they didn't withhold any tax, they don't need to file. Wrong. If you filed or are required to file Forms 1042-S, you must file Form 1042, even with zero withholding.

How to Avoid These Mistakes

Read Publication 515 and the Form 1042 instructions thoroughly before starting, use the IRS's Form 1042 worksheet to organize information before transferring to the official form, reconcile all Forms 1042-S with your Form 1042 before filing, and consider using tax preparation software designed for Forms 1042 and 1042-S, or consult a tax professional experienced in international withholding. IRS Form 1042 Instructions

What Happens After You File

Once you submit Form 1042, here's what to expect:

IRS Processing

The IRS will process your return, typically within several months. They'll match your Form 1042 with the Forms 1042-S you filed to ensure consistency. If everything checks out, you may not hear anything further.

Notices and Bills

If you underpaid tax, filed late, or made errors, the IRS will calculate any interest and penalties and send you a bill. You don't need to calculate these amounts yourself—the IRS does this automatically. Pay any bill promptly to stop additional interest from accruing.

Refunds and Credits

If you overpaid (reported on lines 70a and 70b), you can choose to receive a refund or apply the overpayment as a credit toward your next year's deposits. Indicate your choice on line 71. If you repaid recipients for overwithholding after year-end using approved procedures, that amount can only be claimed as a credit for the following year, not as a 2020 refund.

Record Retention

Keep all records related to Form 1042—including Forms 1042-S, recipient documentation (W-8 forms), payment records, and deposit confirmations—for as long as their contents may be relevant to tax administration. The IRS doesn't specify an exact retention period, but the general rule is to keep tax records for at least 3–7 years. Given the complexity of international withholding, consider retaining records for 7 years or longer.

Amended Returns and Corrections

If you discover errors after filing, file an amended Form 1042 as soon as possible. Check the "Amended Return" box and attach an explanation. For overwithholding discovered after March 15 of the following year, special rules apply. Generally, you cannot adjust your liability or repay the recipient yourself—instead, the foreign recipient must file a U.S. tax return (Form 1040-NR or Form 1120-F) or an amended return to claim a refund. However, Qualified Intermediaries and certain other entities can make collective refund claims under their agreements with the IRS.

Audits and Inquiries

The IRS may request additional documentation or clarification, especially for large withholding amounts or complex situations. Respond promptly to any IRS correspondence and provide all requested documents. IRS Form 1042 Instructions

FAQs

Q1: What's the difference between Form 1042 and Form 1042-S?

Form 1042-S is an information return you provide to each foreign recipient showing how much you paid them and how much you withheld. Think of it as similar to a W-2 or 1099 for foreign persons. Form 1042 is the summary return you file with the IRS that totals all the Forms 1042-S you issued. You must file both—individual Forms 1042-S for each recipient and one Form 1042 summarizing everything. IRS Form 1042 About Page

Q2: Do I need to file Form 1042 if I didn't withhold any tax?

Yes, in many cases. If you're required to file Forms 1042-S (which includes situations where no withholding was required because of treaty benefits or exemptions), you must also file Form 1042. The form serves as both a tax return and an information return. However, if you made no payments to foreign persons that require reporting on Form 1042-S, then you don't need to file Form 1042.

Q3: What happens if I miss the March 15 deadline?

You'll face penalties and interest. The late filing penalty is 5% of unpaid tax per month (up to 25% maximum), and the late payment penalty is 0.5% per month (up to 25% maximum), plus interest. File as soon as possible to minimize penalties. If you have reasonable cause for the delay, you can request penalty abatement by writing to the IRS explaining your circumstances, though approval isn't guaranteed. IRS Form 1042 Instructions

Q4: Can I file Form 1042 electronically?

For the 2020 tax year, Form 1042 itself could be filed on paper. However, if you filed 10 or more Forms 1042-S, you were required to file those electronically through the IRS's FIRE System (Filing Information Returns Electronically). Electronic filing requirements have expanded in recent years, so check current year instructions for updates.

Q5: I'm a small business that occasionally pays foreign contractors. Do I really need to file Form 1042?

If you pay U.S.-source income to foreign persons and you're a withholding agent, yes. Common examples include paying foreign independent contractors for services performed in the U.S., rent payments to foreign landlords for U.S. property, and interest or dividends to foreign investors. However, some payments are specifically excluded. If you're unsure, consult Publication 515 or a tax professional. The penalties for non-filing can be substantial, so it's better to file when in doubt. IRS Publication 515

Q6: What's the difference between Chapter 3 and Chapter 4 withholding?

Chapter 3 withholding is the traditional withholding regime that's been around for decades, covering payments of U.S.-source FDAP income (Fixed, Determinable, Annual, or Periodical income) to foreign persons. Chapter 4 withholding is FATCA (Foreign Account Tax Compliance Act) withholding, enacted in 2010, which applies to "withholdable payments" made to foreign financial institutions and certain other entities. On Form 1042, you must separately report your Chapter 3 liability (line 64b) and Chapter 4 liability (line 64c).

Q7: I discovered I overwithheld tax from a foreign recipient. How do I fix this?

The answer depends on timing. If you discover the error by March 15 of the following year, you can use the "reimbursement procedure"—repay the recipient directly and reduce your deposit or claim a credit on Form 1042. If you discover the error after March 15, different rules apply. Generally, you cannot adjust your return or repay the recipient; instead, the foreign person must file a U.S. tax return or amended return to claim a refund. Exceptions exist for Qualified Intermediaries and certain financial institutions that can make collective refund claims. IRS Form 1042 Instructions

Final Thoughts

Form 1042 may seem daunting at first, but understanding its purpose and requirements makes the process manageable. The form ensures that the U.S. government collects appropriate taxes on U.S.-source income paid to foreign persons while providing a framework for taxpayers to document their withholding obligations. By following the rules, avoiding common mistakes, and keeping good records, you can fulfill your reporting obligations and avoid penalties.

For the most current information, forms, and instructions, always visit IRS.gov/Form1042 or consult Publication 515, "Withholding of Tax on Nonresident Aliens and Foreign Entities." When in doubt, consider working with a tax professional who specializes in international taxation—the cost of expert help is usually far less than the penalties for getting it wrong.

All information in this guide is based on authoritative sources from IRS.gov, specifically the 2020 Form 1042 Instructions and related IRS publications.