Form 1042 Checklist: Tax Year 2018
Understanding Form 1042 and Your Filing Obligations
Form 1042 serves as the annual withholding tax return for U.S.-source income paid to foreign persons. The form reflects income definitions and withholding thresholds established under the
Tax Cuts and Jobs Act for tax year 2018.
Withholding agents must report tax withheld under Chapter 3 on fixed or determinable annual or periodic income. Chapter 3 withholding obligations apply to interest, dividends, rents, and royalties paid to nonresident aliens and foreign entities.
Step-by-Step Form 1042 Filing Process for Tax Year 2018
Step 1: Verify Your Status as a Withholding Agent
Confirm that your organization qualifies as a withholding agent under Chapter 3 regulations before filing Form 1042. The Internal Revenue Service defines a withholding agent as any person who controls, receives, or pays income subject to withholding on behalf of a foreign person.
Domestic and foreign financial institutions, corporations, partnerships, and nominees may all serve as withholding agents. Review your 2018 payment records to determine whether you made reportable payments to foreign persons during the calendar year.
Step 2: Collect Required Documentation from Foreign Payees
Obtain valid documentation from each foreign person before making payments subject to withholding, using the appropriate form based on the payee type and circumstances, such as
Form W-8BEN-E, Form W-8BEN, Form W-8ECI, Form W-8EXP, or Form W-8IMY.
Foreign entities use Form W-8BEN-E, which was introduced in 2014, to record their status and claim treaty benefits. Form W-8BEN continues to be used by foreign individuals for the same purposes.
Certificates are generally valid for three years from the date of signature, ending on the last day of the third succeeding calendar year. Each certificate must identify the payee’s country of tax residence and specify any applicable tax treaty benefits claimed under 2018 income tax treaties.
Step 3: Identify Reportable Payments and Calculate Withholding
Determine which payments trigger Chapter 3 withholding obligations under the 2018 regulations. TCJA Section 864(c)(8), enacted in 2017 and effective for sales after November 27,
2017, treats gain or loss from the sale of a partnership interest by a nonresident alien or foreign corporation as effectively connected income to the extent the partnership is engaged in a U.S.
trade or business.
Apply the 30 percent Chapter 3 withholding rate or the lower treaty rate to reportable income paid during the calendar year. Withheld amounts must be deposited electronically using the
Electronic Federal Tax Payment System, and no changes to deposit frequency rules apply for
2018.
Step 4: Make Electronic Deposits Using EFTPS
You must use EFTPS to make all federal tax deposits for the tax year 2018. Form 8109 was discontinued as of December 31, 2010, and all deposits must be submitted electronically as of
January 1, 2011.
Deposits made through EFTPS must be submitted by 8 p.m. Eastern time the day before the deposit due date. Compare the total Chapter 3 tax withheld and deposited during 2018 against the total reportable income shown on Form 1042 to ensure accuracy.
- Section 1 (Record of Federal Tax Liability, lines 1 through 60) reports your federal tax
- Section 2 (Reconciliation of U.S. Source FDAP Income) reconciles reportable income
- Section 3 (Potential Section 871(m) Transactions) applies to withholding agents making
- Section 4 (Dividend Equivalent Payments by a Qualified Derivatives Dealer) applies to
Step 5: Complete Form 1042 Using the Required Sections
Form 1042 is organized into numbered sections rather than lettered schedules. Complete each applicable section based on your withholding activities and payment types during the calendar year.
The form structure includes the following sections: liability for payments made during applicable quarter-monthly periods. under Chapter 4 with amounts reported on Forms 1042-S. payments under potential Section 871(m) transactions. qualified intermediaries acting as qualified derivative dealers.
Ensure all foreign persons are reported separately by country and claim status on Form 1042-S.
Include payee identification numbers when available and accurately report all amounts withheld during the tax year.
Step 6: Report Treaty Benefits and Reduced Withholding Rates
Document the treaty country and article on the applicable Form 1042-S when a foreign person claims treaty benefits using Form W-8BEN-E. Treaty provisions from existing income tax treaties apply for 2018, and no new treaties affecting United States withholding entered force during the year.
Withheld amounts must reflect the treaty rates claimed rather than the default 30 percent rate.
Form 1042-S serves as the information return that reports specific payment amounts, income types, and withholding rates applied to each foreign person.
Step 7: File by the Deadline or Request an Extension
Submit the completed Form 1042 to the Internal Revenue Service by midnight on March 15,
2019. An automatic six-month extension to file Form 1042 is available by filing Form 7004 by
March 15, 2019.
The extension does not extend the time for payment of tax due with the return. Retain a copy of your filed return and keep all Form W-8 certificates and payment documentation for five years from the filing date.
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Step 8: Reconcile Form 1042 with Form 1042-S Copies
Verify that aggregate amounts shown on all Form 1042-S copies issued to foreign recipients match the totals reported on Form 1042. Each recipient must receive a Form 1042-S showing their country code, income type, withholding rate applied, and tax withheld for 2018.
Discrepancies between Form 1042 and the aggregate totals reported on Forms 1042-S may trigger correspondence from the IRS. Resolve any mismatches before filing to avoid delays in processing your return and potential penalties for inaccurate reporting.
Correcting Errors on Form 1042
File a corrected Form 1042 by checking the “Amended Return” box on the form if you discover errors after filing. Use a Form 1042 corresponding to the tax year you are correcting, and include all necessary supporting documentation with your amended return.
Key Regulatory Changes for Tax Year 2018
Chapter 3 withholding applies to specified financial account payments under FATCA for 2018.
Withholding at 30 percent applies to payments of U.S.-source FDAP income to foreign account holders unless exceptions or treaty benefits apply under Chapters 3 and 4 regulations.
No penalty threshold changes or interest rate adjustments occurred for Form 1042 in 2018.
Failure to withhold and deposit timely Chapter 3 tax may incur accuracy-related penalties under
Section 6662 and failure-to-deposit penalties under Section 6656.
IRS Notice 2017-65 clarified 2018 reporting procedures for disregarded entities and flow-through partnerships, and the withholding agent remains responsible for Chapter 3 tax on payments to such entities unless a valid Form W-8IMY is provided.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
