Annual Withholding Tax Return for U.S. Source
Income of Foreign Persons—2010 Tax Year Checklist
Form 1042 reports income tax withheld from foreign persons on U.S. source income for the
2010 calendar year. You use this annual return to document tax withheld under Chapter 3 of the
Internal Revenue Code on payments made to nonresident aliens, foreign corporations, foreign trusts, and other foreign entities.
Who Must File Form 1042
Every withholding agent or intermediary that receives, controls, has custody of, disposes of, or pays any fixed or determinable annual or periodical income to foreign persons must file Form
1042. This includes individuals, trusts, estates, partnerships, corporations, nominees, government agencies, associations, and tax-exempt foundations, whether domestic or foreign.
You must file this return if you are required to file Form 1042-S, whether or not any tax was withheld or was required to be withheld. Filing is also required if you pay gross investment income to foreign private foundations that are subject to tax under Section 4948(a) of the
Internal Revenue Code.
Verifying Foreign Person Information and Documentation
You must verify the foreign person’s complete name, address, country of residence, and identifying number before processing payments. The beneficial owner must submit valid documentation that establishes foreign status and supports any claims for reduced withholding under applicable tax treaty provisions.
Confirm that the foreign person submitted a valid Form W-8BEN before or concurrent with the first payment. For 2010, Form W-8BEN required explicit disclosure of treaty-based positions claimed and the specific treaty article relied upon.
Retain copies of all Form W-8BEN certifications with your Form 1042 documentation, as these forms are not filed with the Internal Revenue Service but must be available for examination.
Form W-8BEN certification validity periods were restated in 2010 guidance as generally three years, with effective dates aligned to 2010 compliance timelines.
Identifying Income Categories Subject to Withholding
Payments made to foreign persons during 2010 trigger withholding obligations across multiple
income categories
- Dividends paid by U.S. corporations to foreign persons are subject to withholding and
must be reported as U.S.-source income.
- Interest income derived from U.S. sources and paid to foreign persons is subject to
withholding under Chapter 3 rules.
- Royalties and license fees paid for the use of U.S. property or rights constitute
U.S.-source income subject to withholding.
- Certain capital gains arising from the disposition of U.S. property by foreign persons are
subject to withholding and reporting requirements.
- Compensation paid for personal services performed in the United States is treated as
U.S.-source income and may require withholding.
- Scholarship and fellowship grants paid to foreign persons may be subject to withholding,
depending on whether the payments qualify for statutory or treaty exemptions.
The 2010 instructions clarified which scholarship and fellowship payments remain subject to withholding versus those qualifying for exemptions. You must identify all payments that fall within these categories and apply the appropriate withholding requirements under Chapter 3.
Calculating and Applying Withholding Tax Rates
Under sections 871(a) and 881(a) of the Internal Revenue Code, the statutory withholding rate for dividends and interest paid to foreign persons is 30 percent, unless an applicable tax treaty or code provision reduces it. You must apply the correct rate to each payment category based on the income type and any treaty benefits claimed by the beneficial owner.
The 2010 instructions did not change standard rate tables but clarified the interaction between backup withholding and treaty withholding for mixed-status accounts. Verify that treaty-reduced rates are properly documented with valid Form W-8BEN certifications before applying reduced withholding.
Reporting Payments and Withholding by Category
Enter total payments and withholding amounts on Form 1042, organized by income type and applicable withholding rate. The 2010 version reorganized line sequencing to separate treaty-reduced payments from statutory rate payments.
You must ensure subtotals for each category reconcile to supporting documents and Forms
1042-S filed for each foreign person recipient. Lines 1 through 60 report tax liability for the period in which the income was distributed, organized by quarter-monthly and monthly periods.
Claiming Credits From Other Withholding Agents
Form 1042 line 66 allows you to claim credit for amounts already withheld by another withholding agent. If you are a qualified intermediary and the amount entered on line 63c includes amounts withheld by a U.S. withholding agent, you may take a credit on line 66 for those amounts.
You must attach supporting Forms 1042-S issued to you to verify the credit amounts claimed.
The amount on line 66 should equal the total of box 8 amounts from all Forms 1042-S you file for the year.
Failure to attach supporting documentation will result in the denial of the refund or credit being claimed. Keep copies of all Forms 1042-S received from other withholding agents with your permanent tax records.
Reconciling Form 1042 With Forms 1042-S
Cross-reference Form 1042 totals against Forms 1042-S filed for foreign persons during 2010 to ensure accurate reporting. The amount on line 62a should equal the sum of all amounts shown on Forms 1042-S, box 2.
The amount on line 62b should equal the sum of all amounts shown on Forms 1042-S in boxes
7 and 8, minus box 10. Discrepancies between withholding reported on Form 1042 and corresponding Forms 1042-S must be explained or corrected before filing.
Retain a reconciliation schedule with your records to document the verification process and support the accuracy of reported amounts. The Internal Revenue Service requires precise alignment between Form 1042 and all related Forms 1042-S to avoid unnecessary correspondence and potential penalties.
Required Attachments and Record Retention
If you claim credits on line 66, you must attach corresponding Forms 1042-S received from other withholding agents to support the credit amounts claimed. Retain Forms W-8BEN, payment reports, withholding calculations, and reconciliation schedules in your permanent files.
These forms are not filed with Form 1042 but must be available for Internal Revenue Service examination. Keep originals in a separate permanent file organized by tax year.
The withholding agent, not the foreign person, bears signature responsibility for certifying the accuracy and completeness of Form 1042. Sign and date the return in the designated officer certification area before submitting it to the Internal Revenue Service.
Filing Deadline and Deposit Requirements
Submit the completed Form 1042 and required attachments to the Internal Revenue Service by
March 15, 2011. The 2010 instructions specified that late filing of Form 1042 does not prevent the foreign person from filing income tax returns, but may trigger penalties against the withholding agent.
You must use the Electronic Federal Tax Payment System to deposit all withheld taxes. Maintain proof of timely submission, including deposit confirmations and mailing receipts.
If you need additional time to file, you may submit Form 7004 for an automatic extension, but this does not extend the time for payment of tax. Late payment of tax results in penalties and interest charges assessed against the withholding agent.
Key Updates for the 2010 Tax Year
Treaty-based position disclosure requirements were expanded in 2010 instructions to require explicit identification of the treaty article and income category for each claimed reduction. The
Internal Revenue Service modified reporting guidance for backup withholding claims and clarified when a foreign person’s status change terminates prior backup withholding obligations.
To address emerging treaty interpretation inquiries, the 2010 instructions added clarification on reporting withholding for payments to foreign corporations versus foreign individuals.
Withholding agents should review these updates carefully to ensure compliance with all reporting requirements for the 2010 tax year.
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