Form 1042: Your Guide to the Annual Withholding Tax Return for U.S. Source Income of Foreign Persons (2021)

If your business pays income to foreign individuals or entities, you've likely encountered Form 1042. While the form might seem complex at first glance, understanding its purpose and requirements can help you stay compliant and avoid costly penalties.
This guide breaks down everything you need to know about the 2021 Form 1042 in plain English.

What Form 1042 Is For

Form 1042 is the IRS's annual tax return for reporting withholding on payments made to foreign persons. Think of it as the summary document that tells the IRS how much you withheld from U.S.-source income paid to:

Nonresident aliens
Foreign partnerships
Foreign corporations
Foreign estates
Foreign trusts

Types of Withholding Reported

Form 1042 covers multiple categories of withholding, including:

Chapter 3 withholding on dividends, interest, royalties, and other FDAP income paid to foreign persons
Chapter 4 (FATCA) withholding on “withholdable payments” to noncompliant foreign financial institutions
Section 5000C tax on specified federal procurement payments made to foreign contractors
Section 877A tax on certain payments to covered expatriates
Section 1445 withholding on real estate investment trust (REIT) distributions
Section 1446 withholding by publicly traded partnerships on effectively connected income distributed to foreign partners

Form 1042 works hand-in-hand with Form 1042-S (the information return provided to each foreign recipient and filed with the IRS).
If Form 1042-S is like a W-2 for each foreign payee, Form 1042 is your annual reconciliation—similar to how Form 941 relates to W-2s for employees.

When You’d Use Form 1042 (Including Late and Amended Returns)

Regular Filing

You must file Form 1042 by March 15, 2022 (for the 2021 tax year) if you:

Are required to file one or more Forms 1042-S for payments during the year
Made payments subject to withholding to foreign persons
Are a withholding agent, qualified intermediary (QI), withholding foreign partnership (WP), withholding foreign trust (WT), participating foreign financial institution (FFI), or reporting Model 1 FFI

Extension Filing

If you need more time, request an automatic extension using Form 7004.
This grants an additional six months (until September 15, 2022) to file.

The extension applies only to filing, not to payment.
You must still deposit any taxes owed by March 15 to avoid penalties.

Amended Returns

If you discover an error after filing:

Use the same year's form.
Check the “Amended Return” box at the top.
Complete the entire form with corrected data.
Attach a signed statement explaining the corrections.

Do not file an amended return to recover overwithheld taxes from a prior year — use the reimbursement or set-off procedures instead.

Key Rules for 2021

Who Must File

Any withholding agent or intermediary that receives, controls, has custody of, disposes of, or pays a withholdable payment or amount subject to withholding must file Form 1042.
This includes banks, brokers, custodians, QIs, and U.S. or foreign entities acting as withholding agents.

Electronic Deposit Requirement

All deposits must be made electronically via EFTPS.
Paper checks are not accepted. Failure to use EFTPS can trigger a 10% penalty.

One Form Per Capacity

File only one Form 1042 per capacity for the tax year, regardless of how many clients or income types you handle.
If acting in multiple capacities (e.g., as both a QI and non-QI), file a separate Form 1042 for each.

Rounding Rules

Round all dollar amounts to the nearest whole dollar.

Drop amounts under 50 cents
Round up amounts from 50–99 cents

Chapter 3 and Chapter 4 Status Codes

You must provide both Chapter 3 and Chapter 4 status codes, even if certain types of payments don’t require both.
These identify your role and compliance status.

No Double Withholding

You cannot withhold under both Chapter 3 and Chapter 4 for the same payment.
If both apply, credit Chapter 4 withholding against the Chapter 3 liability.

Step-by-Step (High Level)

Step 1: Gather Your Information

Collect:

All Forms 1042-S issued for 2021
Deposit records
Documentation of payments subject to withholding

Step 2: Complete Header Information

Include:

Your name, address, and EIN
Both Chapter 3 and Chapter 4 status codes
If filing as a QI, WP, or WT, use your special EIN (QI-EIN, WP-EIN, or WT-EIN)

Step 3: Fill Out Section 1 – Record of Federal Tax Liability

Report your tax liability for each quarter-monthly period:

1st–7th, 8th–15th, 16th–22nd, 23rd–end of month
Report when the liability was incurred, not when deposits were made.

Ensure monthly totals (lines 5, 10, 15, etc.) match totals on lines 64b, 64c, and 64d.

Step 4: Complete Section 2 – Reconciliation of Payments

Reconcile U.S. source FDAP income payments:

Gross income paid
Amounts withheld
Income not subject to withholding
This section is mandatory, even if no tax was withheld under Chapter 4.

Step 5: Complete Sections 3 and 4 (if applicable)

Section 3: Payments on potential Section 871(m) transactions
Section 4: If you are a Qualified Derivatives Dealer (QDD), complete and attach Schedule Q

Step 6: Complete Section 5 – Tax Liability, Deposits, and Overpayment

Report:

Total Chapter 3 and 4 tax liabilities
Adjustments and deposits made during/after 2021
Credits from other agents and prior-year overpayments
Balance due or overpayment amounts

Step 7: Sign and Date

Sign under penalties of perjury by an authorized person.

Step 8: Mail by March 15

Mail to:
Internal Revenue Service
P.O. Box 409101
Ogden, UT 84409

Common Mistakes and How to Avoid Them

Mistake #1: Using the Wrong EIN

Always confirm you’re using the correct QI-EIN, WP-EIN, or WT-EIN, not your general EIN.

Mistake #2: Reporting Deposits Instead of Liability

Lines 1–60 must reflect when payments were made, not deposit dates.

Mistake #3: Mismatched Totals

Ensure monthly totals in Section 1 equal totals in lines 64b–64d.

Mistake #4: Including Adjustments in the Wrong Section

Do not include adjustments for overwithholding (line 64a) in lines 1–60.

Mistake #5: Missing Status Codes

Always provide both Chapter 3 and Chapter 4 codes.

Mistake #6: Failing to Designate Chapter 3 vs. Chapter 4 Liability

Separate each payment’s liability by chapter before completing the form.

Mistake #7: Skipping Section 2

Section 2 is required, even if no Chapter 4 withholding occurred.

What Happens After You File

IRS Processing

The IRS compares your Form 1042 with the Forms 1042-S you submitted.
They verify reported liabilities, deposits, and reconciliations.

Overpayment Handling

If you overpaid, you can:

Request a refund, or
Apply the credit to your next year’s Form 1042 (line 71)

Balance Due

Pay any balance by the filing deadline to avoid interest and penalties.
The IRS will bill you separately for any computed amounts.

Audit Potential

The IRS may audit your filing and request:

Forms 1042-S
Deposit receipts
Proof of foreign payee status

Penalty and Interest Notices

If you filed or deposited late, expect a notice with assessed penalties and interest.
You may dispute them if you can show reasonable cause.

Refund Timeline

Refunds generally take several weeks to months, depending on IRS workload.

Record Retention

Keep all relevant documentation for at least four years from the filing due date or actual filing date—whichever is later.

FAQs

Q1: Do I need to file Form 1042 if I didn’t withhold any tax?

Yes. If you filed Forms 1042-S, even with zero withholding, you must also file Form 1042 as the annual summary and reconciliation return.

Q2: What’s the difference between Form 1042 and Form 1042-S?

Form 1042-S: Details payments and withholding for each recipient.
Form 1042: Summarizes and reconciles all withholding activity for the year.

Q3: How often do I need to make deposits?

Deposit frequency depends on withheld amounts:

$2,000+ after any quarter-monthly period: deposit within 3 business days
$200–$1,999 at month-end: deposit within 15 days
Less than $200 at year-end: pay with Form 1042 or by March 15

Q4: What penalties apply for errors or late filing?

Late filing: 5% per month (up to 25%)
Late payment: 0.5% per month (up to 25%)
Failure to use EFTPS: 10% penalty
Interest: Accrues until payment is made
Penalties can be waived for reasonable cause.

Q5: Can I file Form 1042 electronically?

Yes. The IRS offers Modernized e-File (MeF) for Form 1042.
Electronic filing reduces errors and speeds up processing.

Q6: What if I made deposits in 2022 for 2021 liabilities?

Deposits made up to March 15, 2022 can be designated for 2021.
Report these on line 65b and indicate the correct tax year in EFTPS.

Q7: How do I correct overwithholding from a prior year?

Do not amend prior returns.
Instead, use:

Reimbursement procedure: Repay recipient and claim a credit on the current year’s return.
Set-off procedure: Reduce future withholding to offset the excess.
Consult Publication 515 for details.

Need More Help?

Form 1042 can be complex—especially for new filers or intermediaries.
Use these resources for assistance:

Call the IRS: 267-941-1000 (6:00 a.m.–11:00 p.m. ET, not toll-free)
Read Publication 515: Comprehensive withholding guidance for foreign payees
Visit IRS.gov/Form1042: Latest forms and instructions
Consult a Tax Professional: Recommended for QIs, WPs, WTs, and FFIs handling complex cases

By understanding these requirements and following the proper steps, you can ensure compliance, avoid penalties, and simplify your annual withholding reporting process.