Form 1042-S Checklist: Tax Year 2012
Purpose of Form 1042-S
Form 1042-S reports U.S.-source income paid to foreign persons subject to federal withholding under Chapter 3 of the Internal Revenue Code. Withholding agents must file this form even when no tax was withheld due to treaty exemptions, Code exceptions, or other qualifying circumstances. The form applies to payments made during the 2012 calendar year to foreign individuals, corporations, partnerships, trusts, and other non-U.S. persons.
Preparation Requirements
Withholding Agent Status and QI Agreements
You must verify whether your organization operates as a qualified intermediary under the 2012 QI agreement or holds a withholding foreign partnership or trust designation. QIs assuming primary withholding responsibility under Chapter 3 must report using Exemption Code 06 in box 6 of Form 1042-S. QIs that do not assume primary withholding responsibility must use Exemption Code 09 when the income qualifies as exempt from withholding based on representations in the withholding statement associated with Form W-8IMY.
Income Classification and Codes
Box 1 requires the correct income code from the 2012-year code list published in the Form 1042-S instructions. Income code 40 applies to U.S.-source dividend equivalents under IRC section 871(m) for applicable dividend-linked derivative transactions paid during 2012. This code covers payments other than substitute dividends that qualify as U.S.-source dividends under section 871(m), including payments on specified notional principal contracts.
Gross Income and Withholding Rates
- Report gross income in box 2 before applying any withholding allowances or treaty reductions.
- Apply the standard 30% withholding rate unless a treaty-reduced rate applies for 2012.
- Portfolio interest qualifying under IRC section 871(h) receives zero withholding when proper certification requirements are met and documented before or at the time of payment.
- Use Exemption Code 05 in box 6 for portfolio interest exempt under the Internal Revenue Code.
Recipient Classification
Box 13b requires recipient codes specific to the 2012 form structure, and you must select the appropriate code based on the recipient's classification.
- Code 01 identifies individual beneficial owners.
- Code 02 designates corporations that are not qualified intermediaries or withholding foreign partnerships.
- Code 03 applies to partnerships other than withholding foreign partnerships.
- Code 12 identifies qualified intermediaries receiving payments.
- Codes 13 through 16 designate QI or private arrangement intermediary withholding rate pools.
- Code 09 applies exclusively to artists or athletes when compensation directly relates to that occupation.
Exemption Codes for Non-Withholding Situations
- Exemption Code 01: Income effectively connected with a U.S. trade or business (enter tax rate 00.00 in the applicable rate box).
- Exemption Code 03: Non-U.S.-source income reported for information purposes only and not subject to U.S. taxation.
- Exemption Code 04: Income exempt under an income tax treaty between the United States and the recipient's country of residence.
- Exemption Code 05: Portfolio interest exempt under IRC section 871(h) or 881(c) with proper certification.
Withholding and Credit Reporting
Box 7 requires the amount of federal tax withheld by the withholding agent completing the form. Box 8 reports tax withheld by other withholding agents, including third-party administrators or backup withholders in the payment chain. The total withholding credit shown in box 9 must equal the sum of the amounts reported in boxes 7 and 8.
Non-Qualified Intermediary Entity Information
Boxes 17 through 20 capture information about non-qualified intermediary flow-through entities when income passes through such entities before reaching the beneficial owner. You must enter the NQI's name, country code, address, and U.S. taxpayer identification number if one has been issued. This information clarifies the reporting chain and assists the IRS with payment matching and compliance verification.
Copy Requirements and Distribution
Withholding agents must prepare five copies of Form 1042-S for each payment or group of payments reportable on a single form.
- Copy A must be filed with the Internal Revenue Service by attaching it to Form 1042-T and submitting it to the address shown in the Form 1042-T instructions.
- Copies B, C, and D must all be provided to the recipient of the income by March 15, 2013.
- Copy E must be retained by the withholding agent for record-keeping purposes.
2012 Year-Specific Updates and Considerations
IRC Section 871(m) Dividend Equivalents
Section 871(m) was enacted in March 2010 as part of the Hiring Incentives to Restore Employment Act. Income code 40 became available for reporting other U.S.-source dividend equivalents under this section, covering payments that are contingent on or determined by reference to U.S.-source dividends.
These payments include substitute dividends from securities lending or sale-repurchase transactions, payments under specified notional principal contracts, and other substantially similar payments designated by the IRS.
Qualified Intermediary Agreement Rules
The 2012 QI agreement emphasizes the distinction between QIs that assume primary withholding responsibility and those that do not. QIs assuming primary withholding responsibility must report using Exemption Code 06 and Recipient Code 12 when they are the recipient of the payment.
QIs not assuming primary withholding responsibility must ensure that the beneficial owners' information flows through correctly in the reporting chain, using Exemption Code 09 when representing that income is exempt from withholding.
Pro-Rata Basis Reporting Requirements
The 2012 instructions mandate pro-rata basis reporting when multiple beneficial owners exist through a single withholding agent account. You must allocate income and withholding proportionally across recipients according to their beneficial ownership interests. Aggregation of payments to multiple beneficial owners on a single Form 1042-S is not permitted unless specific authorization exists in the instructions.
Portfolio Interest Certification Requirements
Foreign lenders claiming portfolio interest exemption under IRC section 871(h) must provide the required certification or Form W-8 to the withholding agent. The withholding agent must receive valid documentation before or at the time of payment to properly apply the exemption. The certification must establish that the beneficial owner is not a U.S. person and does not fall within the categories of persons ineligible for the portfolio interest exemption, such as 10-percent shareholders or certain foreign banks.
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This checklist is for educational purposes only and does not constitute tax or legal advice. Always review official IRS instructions and consult a qualified professional for guidance.
