Form 1042: Annual Withholding Tax Return for U.S. Source Income of Foreign Persons (2024)

If your business or organization pays certain types of income to foreign individuals or entities, you may need to withhold U.S. taxes and report these payments to the IRS using Form 1042. This guide breaks down everything you need to know about this important annual tax form for 2024.

What the Form Is For

Form 1042 is the annual tax return that “withholding agents” use to report taxes they've withheld from payments made to foreign persons. Think of it as a summary document that tells the IRS: “Here's how much money we paid to foreign recipients this year, and here's the tax we withheld from those payments.”

The form covers several types of withholding situations under different sections of the tax code (called “chapters”). Specifically, you'll use Form 1042 to report tax withheld under:

Chapter 3: Payments to nonresident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts
Chapter 4: Withholdable payments related to FATCA (the Foreign Account Tax Compliance Act)
Section 5000C: Federal procurement payments to foreign contractors
Section 877A: Certain payments to covered expatriates

The form works hand-in-hand with Form 1042-S, which provides detailed information about each payment to each foreign recipient. If Form 1042-S is like individual receipts, Form 1042 is the summary statement that totals everything up. The form also reconciles your U.S. source income subject to reporting and tracks your deposit history throughout the year.
Source: IRS.gov

When You’d Use It (Including Late and Amended Returns)

Regular Filing Deadline

For the 2024 tax year, Form 1042 is due by March 17, 2025. This deadline applies whether you're filing on paper or electronically. The form covers all payments made during the calendar year 2024, regardless of your organization's fiscal year.

Who Must File

You must file Form 1042 if you are a withholding agent who:

Filed or was required to file one or more Forms 1042-S
Paid gross investment income to foreign private foundations
Made specified federal procurement payments to foreign persons
Paid eligible deferred compensation to covered expatriates
Are a qualified intermediary (QI), withholding foreign partnership (WP), withholding foreign trust (WT), or participating foreign financial institution (FFI) claiming a collective refund

Extensions

If you need more time, you can request an automatic extension by filing Form 7004. However, this only extends the time to file—not the time to pay. Any tax owed must still be deposited by the original due date to avoid penalties.

Amended Returns

If you discover errors after filing your original Form 1042, you must file an amended return.
Check the “Amended Return” box at the top of a new Form 1042 for the year you're correcting, complete the entire form with corrected information, and attach a written explanation of why you're amending.

Common reasons include:

Mathematical errors in reporting tax liability
Incorrect deposit amounts
Adjustments when revising amounts from withholding rate pools to specific recipients

Important: Do not file an amended return to recover taxes you overwithheld in a prior year — there are separate procedures for that adjustment.
Source: IRS Instructions for Form 1042

Key Rules and Changes for 2024

Several important rules and updates apply to Form 1042 for the 2024 tax year.

Electronic Filing Requirements

Electronic filing is mandatory for:

Financial institutions acting as withholding agents
Entities required to file 10 or more information returns during the year
Partnerships with more than 100 partners

However, Notice 2024-26 provides relief: foreign persons (including foreign financial institutions) are exempt from the electronic filing requirement for tax year 2024 (filed in 2025). If this exemption applies, you can file on paper without requesting a waiver.

Credit Forward Framework Sunset

The “credit forward framework” that some withholding agents used is being phased out.
If you were using it before September 11, 2024, you may continue through December 31, 2024, but no withholding agent may use this framework after that date.

Withholding Agent Status Codes Required

You must include both Chapter 3 and Chapter 4 status codes on your Form 1042, regardless of which types of payments you're reporting.
Omitting these codes is one of the most common filing errors.

One Form Per Capacity Rule

You should file only one Form 1042 consolidating all recipient information, even if you have multiple clients, branches, or income types.
However, if you're acting in more than one capacity (e.g., as a QI for some accounts and as a non-qualified intermediary for others), you must file a separate Form 1042 for each capacity.

Reliance on Proposed Regulations

The IRS allows taxpayers to rely on certain 2018 proposed regulations that reduce compliance burden.
For example, partnerships and trusts may withhold in a subsequent year on a foreign partner's or beneficiary's income share, designate deposits as attributable to the preceding year, and report accordingly.
Source: IRS.gov Form 1042

Step-by-Step Filing Process (High Level)

Step 1: Gather Your Documentation

Collect all Forms 1042-S you've filed (or will file) for the year, your deposit records from EFTPS, records of all payments made to foreign persons, and documentation of any adjustments for overwithholding or underwithholding.

Step 2: Complete Withholding Agent Information

Enter your full information at the top of the form: name, address, EIN, or, if applicable, your QI-EIN, WP-EIN, or WT-EIN.
Include both Chapter 3 and Chapter 4 status codes—these are mandatory regardless of payment type.

Step 3: Fill Out Section 1 — Record of Federal Tax Liability (Lines 1–60)

This section is your monthly calendar showing tax liability by quarter-monthly periods (ending on the 7th, 15th, 22nd, and last day of each month).
It reports when you incurred the tax liability, not when you deposited funds. The sum of monthly totals must match your total tax liability later in the form.

Step 4: Complete Section 2 — Reconciliation of U.S. Source Income

Reconcile your total gross U.S. source income paid and report totals from your Forms 1042-S. This ensures reported amounts match across all forms.

Step 5: Complete Sections 3 and 4 (If Applicable)

Section 3: For payments under potential Section 871(m) transactions
Section 4: For qualified intermediaries acting as qualified derivatives dealers (QDDs)

Step 6: Calculate Your Balance Due or Overpayment

Report total tax liability, deposits made during the year, any adjustments, and calculate whether you owe additional tax or have an overpayment.

Step 7: Sign and Submit

The form must be signed under penalties of perjury.
Mail paper returns to the Ogden, UT address or file electronically if required (and not exempt).
Source: IRS Instructions for Form 1042

Common Mistakes and How to Avoid Them

Filing errors can trigger IRS scrutiny, penalties, and delays. Below are common mistakes and how to prevent them.

Mistake #1: Missing or Incorrect EIN

Solution: Double-check that you're using the correct EIN. If you're filing as a QI, WP, or WT, use the specific QI-EIN, WP-EIN, or WT-EIN—not your regular business EIN.

Mistake #2: Omitting Chapter 3 and 4 Status Codes

Solution: Always include both codes, even if reporting only one payment type. This field is mandatory.

Mistake #3: Confusing Tax Liability with Deposits

Solution: Section 1 (lines 1–60) reports when tax liability was incurred, not when funds were deposited. These dates often differ.

Mistake #4: Math Errors Between Sections

Solution: Verify that totals in Section 1 match those on lines 64b, 64c, and 64d. Many rejected returns fail this simple math check.

Mistake #5: Misplacing Adjustments

Solution: Do not include adjustments reported on line 64a within Section 1 (lines 1–60). Keep adjustments in their proper section.

Mistake #6: Filing Multiple Forms Unnecessarily

Solution: File a single Form 1042 consolidating all Forms 1042-S unless acting in multiple capacities.

Mistake #7: Amending to Recover Prior-Year Overwithholding

Solution: Never file an amended return for prior-year overwithholding. Use IRS-approved overwithholding adjustment procedures instead.
Source: IRS Instructions for Form 1042

What Happens After You File

Once you submit Form 1042, several things occur.

IRS Processing

The IRS processes your return and matches it against the Forms 1042-S and EFTPS deposit records you submitted. This can take several weeks to months.

Penalties and Interest (If Applicable)

If your return is late, incomplete, or shows unpaid tax, the IRS will calculate penalties and interest and send you a bill.
You do not include these amounts on line 69 of Form 1042.

Late filing penalty: 5% per month (maximum 25%)
Late payment penalty: 0.5% per month (maximum 25%)
Interest: Accrues on unpaid tax until paid

Balance Due or Refund

If you owe tax, you'll receive a notice explaining payment procedures.
If you overpaid, the IRS will process your refund (though this can take time).
Qualified intermediaries and similar entities must follow their specific agreement procedures for collective refunds.

Correspondence and Notices

The IRS may send notices if discrepancies arise between your Form 1042, Forms 1042-S, and deposit records.
Respond promptly to avoid penalties or additional assessments.

Retention Requirements

Keep copies of your Form 1042, supporting documents, and all IRS correspondence for at least four years from the due date or filing date—whichever is later.
Certain withholding agents under special agreements may have longer retention requirements.
Source: IRS.gov Discussion of Forms 1042

Frequently Asked Questions (FAQs)

Q1: Do I Need to File Form 1042 if No Tax Was Actually Withheld?

Yes. If you filed or were required to file Forms 1042-S (even with zero withholding), you must still file Form 1042. The form reconciles all reportable payments, including those exempt under tax treaties.

Q2: When and How Do I Deposit Withheld Taxes?

All deposits must be made through EFTPS.
Deposit schedules depend on undeposited tax amounts:

$2,000+ at quarter-month end → deposit within 3 business days
$200–$1,999 at month end → deposit by the 15th of the next month
Under $200 for the year → may pay with Form 1042 by March 17, 2025

To be timely, EFTPS deposits must be submitted by 8 p.m. ET the day before the due date.

Q3: What's the Difference Between Form 1042 and Form 1042-S?

Form 1042-S: Filed for each foreign recipient (similar to Form 1099)
Form 1042: Annual summary of all withholding (similar to Form 1096)

You need both.

Q4: Can I File Form 1042 Electronically if I'm a Foreign Withholding Agent?

For 2024, Notice 2024-26 exempts foreign withholding agents (including FFIs) from mandatory e-filing.
You can file on paper without requesting a waiver, or e-file voluntarily.

Q5: What if I Discover I Underwithheld Tax During the Year?

Follow Reg. sections 1.1461-2(b) (Chapter 3) or 1.1474-2(b) (Chapter 4).
You must withhold the underwithheld amount from the next payment to the same recipient—or pay it yourself if no future payment occurs. Report adjustments properly on Form 1042.

Q6: How Do I Handle Overwithholding After Year-End?

If discovered by March 15 of the following year, you may use:

Reimbursement procedure (repay the payee, then claim refund/credit), or
Set-off procedure (apply excess to other withholding obligations).

After this period, the payee may need to file a refund claim.

Q7: I'm a U.S. Partnership with Foreign Partners. Do I File Form 1042?

Possibly. If you’re withholding under Section 1446 and required to file Forms 1042-S, you must file Form 1042.
The form also applies to publicly traded partnerships distributing effectively connected taxable income to foreign partners.
Consult Publication 515 and the Form 1042 instructions for details.
Source: IRS Instructions for Form 1042

For More Information

IRS Form 1042 Main Page: www.irs.gov/Form1042
Instructions for Form 1042 (2024): www.irs.gov/instructions/i1042
Publication 515: Withholding of Tax on Nonresident Aliens and Foreign Entities
EFTPS (Electronic Federal Tax Payment System): www.eftps.gov
IRS International Accounts Assistance: 267-941-1000 (6:00 a.m.–11:00 p.m. ET)