Form 1042-S (2014): A Comprehensive Guide for Withholding Agents
What the Form Is For
Form 1042-S, ""Foreign Person's U.S. Source Income Subject to Withholding,"" is an information return used by U.S. withholding agents to report payments made during the 2014 calendar year to foreign persons. A withholding agent is any U.S. or foreign person—including individuals, corporations, partnerships, trusts, or other entities—who has control, receipt, or custody of U.S. source income paid to foreign recipients and who may be required to withhold tax on those payments.
The form serves two primary purposes: it reports the gross amount of U.S. source income paid to foreign persons, and it documents any federal income tax withheld from those payments under Chapter 3 or Chapter 4 of the Internal Revenue Code. Think of it as the international equivalent of Form 1099 or W-2—it creates a paper trail for the IRS and informs foreign recipients about income they received and taxes withheld.
The 2014 version of Form 1042-S was significantly updated to accommodate reporting requirements under the Foreign Account Tax Compliance Act (FATCA), also known as Chapter 4 withholding. This means withholding agents must report not only traditional Chapter 3 withholding information but also FATCA-related data when applicable. Reportable payments include dividends, interest (including certain deposit interest paid to nonresident aliens), rents, royalties, compensation for personal services, annuities, pension distributions, gambling winnings, notional principal contract income, corporate distributions, and effectively connected income. Withholding agents must file Form 1042-S even if no tax was withheld—for example, when income is exempt under a U.S. tax treaty or when income is effectively connected with a U.S. trade or business. IRS.gov
When You'd Use It (Including Late and Amended Filings)
Original Filing Timeline
For income paid during the 2014 calendar year, withholding agents must file Form 1042-S with the IRS by March 16, 2015. The same deadline applies to furnishing copies to income recipients. Along with Form(s) 1042-S, withholding agents must also file Form 1042, the Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, which summarizes the total amounts withheld. IRS.gov
Extensions
If you need additional time to file, you can request an automatic 30-day extension by filing Form 8809, ""Application for Extension of Time To File Information Returns,"" before the March 16, 2015 deadline. A second Form 8809 may be submitted if more time is needed. To request an extension for furnishing recipient copies, send a written request to the IRS Information Returns Branch in Kearneysville, West Virginia. If you're requesting extensions for more than 10 withholding agents, electronic submission is required. IRS.gov
Amended Returns
If you discover an error on a previously filed Form 1042-S, you must correct it as soon as possible by filing an amended return. To amend a paper form, prepare a new Form 1042-S with all correct information and mark an ""X"" in the ""Amended"" checkbox at the top of the form. File it with a new Form 1042-T transmittal form. You must also provide corrected statements to recipients promptly. If your corrections affect information reported on Form 1042, you'll need to amend that form as well. Remember: if you're required to file electronically, your amended returns must also be submitted electronically unless you qualify for a waiver. IRS.gov
Key Rules for 2014
Mandatory Electronic Filing
Beginning January 1, 2014, all financial institutions (U.S. or foreign) must file Forms 1042-S electronically, regardless of how many forms they have. Non-financial institution withholding agents must file electronically if they have 250 or more forms to submit. Electronic filing is done through the IRS Filing Information Returns Electronically (FIRE) System at fire.irs.gov. Filers should check transmission status within five business days, as the IRS will not mail error reports for rejected files. Hardship waivers from electronic filing are available for non-financial institutions by submitting Form 8508 at least 45 days before the due date. IRS.gov
FATCA Reporting Requirements
The 2014 form includes new fields for reporting under Chapter 4 (FATCA). Withholding agents must report chapter 4 status codes, exemption codes, and additional recipient information (such as account numbers, dates of birth, and foreign tax identification numbers) when reporting withholdable payments. However, a special transitional rule applies: for U.S. source FDAP income paid before July 1, 2014, withholding agents are not required to determine or report chapter 4 status. IRS.gov
Deposit Interest Reporting
Beginning in 2013 (and continuing for 2014), deposit interest of $10 or more paid to certain nonresident alien individuals must be reported if the recipient is a resident of a country identified in Revenue Procedure 2012-24. This represents an expansion of reporting requirements that many withholding agents may not have encountered previously. IRS.gov
Substitute Forms Must Be Exact
Any privately printed substitute Form 1042-S must be an exact copy of the official IRS Form 1042-S, particularly Copy A filed with the IRS. Deviations from the official format may result in rejection and penalties. IRS.gov
Step-by-Step (High Level)
Step 1: Determine Your Filing Obligation
Review all payments made during 2014 to foreign persons. You must file Form 1042-S if you are a withholding agent who paid U.S. source FDAP income to a foreign person, even if no withholding was required. Individuals making payments outside their trade or business with no withholding required are generally exempt from filing.
Step 2: Gather Required Documentation
Collect all withholding certificates (Forms W-8 series) from recipients, payment records, and information about the nature and amounts of income paid. You'll need recipient names, addresses, taxpayer identification numbers (TINs), chapter 3 and chapter 4 status codes, income codes, exemption codes, country codes, and tax rates applied.
Step 3: Complete Form 1042-S
Fill out a separate Form 1042-S for each recipient and each type of income paid. At minimum, you must complete boxes 1 (income code), 2 (gross income—which cannot be zero), 7 (federal tax withheld), 10 (country code), 12a (tax rate), 13a-13f (recipient information), and 14a (withholding agent information). For withholdable payments, additional boxes are required. Use only the specific codes listed in the instructions—do not create your own. If different tax rates applied during the year, file separate forms for each rate; do not attempt to ""blend"" rates.
Step 4: File with the IRS
If filing electronically (required for financial institutions and filers with 250+ forms), submit through the FIRE System at fire.irs.gov. If filing on paper, send Copy A of all Forms 1042-S together with Form 1042-T (transmittal form) to the address shown in the Form 1042-T instructions. File by March 16, 2015.
Step 5: Furnish Copies to Recipients
Provide Copies B, C, and D to income recipients by March 16, 2015. Keep Copy E for your records.
Step 6: File Form 1042
Complete and file Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, which summarizes total payments and withholding reported on all Forms 1042-S. This form is also due March 16, 2015. IRS.gov
Common Mistakes and How to Avoid Them
- Failing to File When Required: Many withholding agents mistakenly believe they don't need to file Form 1042-S if no tax was withheld. In reality, you must file whenever you pay reportable income to a foreign person, even if the income is exempt under a treaty or Code provision. Always file unless a specific exception applies.
- Missing the Electronic Filing Requirement: Financial institutions and filers with 250 or more forms must file electronically. Many first-time filers overlook this mandate and attempt to file on paper, risking penalties. Check your filing threshold early and register for the FIRE System well before the deadline.
- Reporting Zero Gross Income: Box 2 (gross income) cannot be zero. If you mistakenly enter zero, the IRS will reject your form. Always report the actual gross amount paid before withholding.
- Using Incorrect or Unofficial Codes: The instructions provide specific lists of income codes, exemption codes, status codes, and country codes. Using codes not on these lists will cause processing errors. Double-check that every code you enter appears in the official instructions.
- Blending Tax Rates: If a recipient's tax rate changed during 2014 (for example, due to a treaty certification received mid-year), you must file separate Forms 1042-S for each rate period. You cannot average or blend rates on a single form.
- Incomplete Forms: All required boxes must be completed based on the nature of the payment. At minimum, boxes 1, 2, 7, 10, 12a, 13a, 13e, 13f, and 14a are mandatory. For withholdable payments, boxes 4a, 4b, 12c, and 13i are also required. Review the form carefully before submission.
- Submitting Non-Conforming Substitute Forms: If you use a privately printed form instead of the official IRS version, Copy A must be an exact replica. Even minor formatting differences can result in rejection and penalties. When in doubt, use the official form.
- Not Providing Recipient Copies on Time: Withholding agents sometimes focus on the IRS filing deadline but forget that recipient copies are due the same day—March 16, 2015. Late recipient copies trigger separate penalties.
- Failing to Amend Errors Promptly: If you discover a mistake after filing, correct it immediately by filing an amended Form 1042-S. Delays in correcting errors can result in penalties. IRS.gov
What Happens After You File
IRS Processing
After you file Forms 1042-S, the IRS processes the information and matches it against Forms 1042 and recipients' tax returns (typically Form 1040NR for nonresident aliens). The IRS uses this data to verify that appropriate withholding occurred and to detect underreporting of U.S. source income by foreign persons.
Electronic Filers
If you filed electronically through the FIRE System, you must check the transmission status within five business days. The system will indicate whether your file was accepted or rejected. The IRS will not send paper error reports for electronic submissions, so this check is critical. If errors are detected, correct and resubmit promptly.
Paper Filers
Paper filers typically won't receive acknowledgment unless there's a problem. Keep Copy E of all Forms 1042-S and copies of Form 1042 and Form 1042-T for at least three years, or maintain the ability to reconstruct the data.
Recipient Use
Foreign persons who receive Form 1042-S use it to prepare their U.S. tax returns (usually Form 1040NR) or to claim treaty benefits. They may also use it to claim foreign tax credits in their home countries. Some recipients may not need to file a U.S. return if all income was properly withheld and no refund is due.
Penalties for Non-Compliance
If you file late, fail to provide recipient copies, submit incorrect information, or don't file electronically when required, the IRS will assess penalties. For timely corrections and reasonable cause, penalties may be abated. The IRS may also follow up with correspondence if discrepancies are detected between Forms 1042, 1042-S, and recipient returns. IRS.gov
FAQs
1. I'm an individual who occasionally pays interest to a foreign friend on a personal loan. Do I need to file Form 1042-S?
Generally, no. Individuals who make payments outside their trade or business and who are not required to withhold are not required to file Form 1042-S. However, if withholding was required (or actually done), you must file regardless of whether the payment was made in a business context. IRS.gov
2. The income I paid was fully exempt under a U.S.-UK tax treaty. Do I still need to file?
Yes. You must file Form 1042-S even when no tax was withheld due to a treaty exemption, Code exemption, or because income was effectively connected with a U.S. trade or business. The form documents that the payment occurred and that the proper treaty or exemption was applied. IRS.gov
3. What's the penalty if I file a few days after March 16, 2015?
The penalty depends on how late you are. If you file within 30 days after the deadline, the penalty is $30 per form, with a maximum of $250,000 per year ($75,000 for small businesses). If you file between 31 days late and August 1, 2015, the penalty increases to $60 per form, with a maximum of $500,000 ($200,000 for small businesses). Filing after August 1, 2015, results in a $100 per form penalty, with a maximum of $1.5 million ($500,000 for small businesses). Intentional disregard of filing requirements carries a penalty of the greater of $250 per form or 10% of the reportable amount, with no maximum. IRS.gov
4. I made a mistake on a Form 1042-S I already filed. How do I correct it?
File an amended Form 1042-S as soon as possible. Prepare a new form with all correct information and mark an ""X"" in the ""Amended"" box at the top. If filing electronically, follow the FIRE System procedures for amendments. If filing on paper, submit the amended form with a new Form 1042-T. Also provide a corrected copy to the recipient. If your amendment affects Form 1042, you'll need to amend that form as well. IRS.gov
5. I'm a small financial institution with only 50 Forms 1042-S. Do I still have to file electronically?
Yes. Beginning January 1, 2014, all financial institutions (U.S. and foreign) must file Forms 1042-S electronically, regardless of the number of forms. The 250-form threshold applies only to non-financial institutions. You'll need to register for and use the IRS FIRE System. IRS.gov
6. What's the difference between Chapter 3 and Chapter 4 withholding, and why does it matter for 2014?
Chapter 3 refers to traditional withholding on U.S. source FDAP income paid to foreign persons under sections 1441-1443 of the Internal Revenue Code. Chapter 4 refers to withholding under FATCA (Foreign Account Tax Compliance Act), which requires withholding on certain payments to foreign financial institutions and other foreign entities that don't comply with FATCA requirements. The 2014 Form 1042-S was redesigned to capture both types of withholding. For 2014, a transitional rule applies: you don't need to report Chapter 4 information for payments made before July 1, 2014. IRS.gov
7. Can I get an extension beyond the automatic 30-day extension granted by Form 8809?
Yes. You can file a second Form 8809 before the initial extended due date expires to request additional time. However, extensions are not automatic for the second request, and you should provide a compelling reason. Extensions to furnish recipient copies require a separate written request to the IRS Information Returns Branch. IRS.gov
For More Information
The official 2014 Instructions for Form 1042-S and the form itself are available at IRS.gov. For comprehensive guidance on withholding requirements, consult Publication 515, ""Withholding of Tax on Nonresident Aliens and Foreign Entities."" For electronic filing specifications, see Publication 1187. If you have tax law questions about withholding under Chapter 3 or Chapter 4, call the IRS international tax line at 267-941-1000 (not toll-free).
