What Form 1042 (2021) Is For
Form 1042 (2021) is the annual withholding tax return used by a withholding agent to report U.S.-source income paid to foreign individuals, foreign corporations, foreign partnerships, foreign estates, and foreign trusts. It summarizes amounts paid, tax withheld, and gross income earned by nonresident individuals or entities subject to U.S. income tax. The Internal Revenue Service requires this form to ensure the proper reporting of withholding tax and tax liability on all source income subject to U.S. taxation.
When You’d Use Form 1042 (2021)
You must file Form 1042 if, during the preceding calendar year, you made withholdable payments to any foreign individuals or foreign entities. This includes nonresident aliens, foreign corporations, and foreign partnerships that receive income from foreign persons in the United States from U.S. sources.
A financial institution, publicly traded partnership, or qualified investment entity must also file if it withheld income tax under Chapters 3 or 4. The due date for filing is March 15, unless a legal holiday extends the deadline. Electronic filing is required for most filers. Late filers may amend a prior submission by marking the return as amended and providing an explanation for any corrections.
Key Rules or Details for 2021
- Who must file: Every withholding agent, financial institution, or flow-through entity that controls or pays source income subject to withholding tax for foreign individuals is required to file an annual withholding tax return.
- Electronic Deposit Requirement: All taxes must be deposited through the Electronic Federal Tax Payment System (EFTPS). The Internal Revenue Service does not accept paper checks.
- Single filing rule: File only one Form 1042 per capacity, even if you manage multiple foreign branches or foreign partners. Separate filings are required if you act in more than one withholding role.
- Income reporting: Report gross amount of withholdable payments, including eligible deferred compensation items, scholarship or fellowship grants, and certain income exempted under a tax treaty.
- Withholding categories: Report tax withheld under both Chapter 3 and Chapter 4. Do not apply double withholding on the same gross income.
- Employer identification number: Include your withholding agent’s name and correct EIN. Use specific EINs for Qualified Intermediaries (QI), Withholding Partnerships (WP), or Withholding Trusts (WT).
- Administrative exemption: Small filers with reasonable cause may be eligible for an exemption from electronic filing, provided approval is granted in advance.
Browse more tax form instructions and filing guides in our Forms Hub.
Step-by-Step (High Level)
Step 1: Gather payment and withholding information
Collect all Forms 1042-S, deposit receipts, and documentation for all foreign persons and nonresident alien individuals. Include records for withholdable payments, foreign partner’s share, and any tax paid for tax purposes.
Step 2: Complete filer identification
Enter your withholding agent’s name, employer identification number, and chapter status codes. Indicate whether you are a foreign financial institution, publicly traded partnership, or other financial institution acting as a withholding agent.
Step 3: Record federal tax liability
In Section 1, report amounts subject to income tax by quarter-monthly periods. Record the tax liability when the payment occurred, not when the tax was deposited.
Step 4: Reconcile payments and withholding
Complete Section 2 by reconciling total amounts paid, tax withheld, and gross income. Include any tax treaty reductions or treaty benefits claimed by a beneficial owner.
Step 5: Address special withholding situations
If you have foreign branch operations, publicly traded trusts, or foreign partners in flow-through entities, ensure each foreign partner’s share of effectively connected income is properly reported and withheld.
Step 6: Finalize totals and sign
Summarize your total federal tax liability, including backup withholding and unpaid tax. Indicate credits, overpayments, and your total tax deposited for the tax year. Sign the return under penalties of perjury.
Step 7: File the return on time
File Form 1042 by the due date of March 15. Returns must be filed electronically unless an administrative exemption applies. The mailing address for paper filers is the IRS center in Ogden, Utah.
Learn more about federal tax filing through our IRS Form Help Center.
Common Mistakes and How to Avoid Them
- Using the wrong EIN: Verify that the employer identification number entered matches your withholding agent’s chapter status to ensure accurate processing.
- Reporting deposits instead of liability: Enter the liability when income was paid rather than when the deposit was made to maintain accurate reporting.
- Incorrectly combining Chapters 3 and 4: Separate income subject to each withholding chapter to avoid double reporting or misclassification.
- Omitting required forms: Always attach all Forms 1042-S that detail the amounts paid to each foreign recipient.
- Missing foreign partner details: Confirm that all foreign partners in flow-through entities have their income properly allocated and tax withheld.
- Late filing: File and deposit payments by the due date to avoid penalties and interest charges from the IRS.
- Ignoring treaty benefits: When claiming treaty benefits, confirm eligibility under the tax treaty and maintain documentation in case of audit.
Learn more about how to avoid business tax problems in our guide on How to File and Avoid Penalties.
What Happens After You File
After Form 1042 is filed, the Internal Revenue Service reviews the return to verify that it aligns with the Forms 1042-S submitted. If an overpayment is identified, the IRS applies the credit to the next tax year or issues a refund. When a balance remains due, payment must be made promptly to avoid incurring additional interest. The IRS may request documentation, such as income codes, payment statements, or proof of tax deposited. Records should be retained for at least four years from the filing date for compliance review purposes.
FAQs
Do I need to file Form 1042 if no tax was withheld from foreign persons?
Yes, Form 1042 must be filed whenever reportable payments were made to foreign persons, even if no tax was withheld, since the form summarizes all withholding activity.
How do I report gross income and federal tax liability on Form 1042?
You should record the total gross income paid and calculate your federal tax liability based on the amounts subject to withholding tax during the tax year.
What is the due date for the annual withholding tax return?
The due date for filing Form 1042 is March 15 following the end of the tax year. If the date falls on a legal holiday, the deadline moves to the next business day.
Can Form 1042 be filed electronically with the Internal Revenue Service?
Yes, the IRS requires most withholding agents to file Form 1042 electronically. Only those with an approved administrative exemption are permitted to file on paper.
What happens if a withholding agent does not report payments properly?
Failure to report payments accurately or to file Form 1042 on time may result in penalties for willful neglect, interest on unpaid taxes, and loss of treaty benefits.
How does a withholding agent claim reasonable cause for late filing?
A withholding agent must provide a written explanation to the IRS showing that the failure to file or deposit tax was due to reasonable cause and not intentional disregard.
How do publicly traded partnerships and foreign financial institutions handle their filing requirements?
These entities must file a separate form if acting in more than one withholding capacity and report all amounts paid, including payments to foreign partners or beneficial owners.
