What Form 1042 (2016) Is For
Form 1042 (2016) is the annual withholding tax return used by a withholding agent to report income paid to foreign individuals, including nonresident aliens, foreign corporations, and foreign entities. It reports U.S. source income subject to withholding tax, as well as the total tax withheld.
This return ensures that the Internal Revenue Service receives details about the income of foreign individuals and verifies that tax liability is accurately paid. The form also covers certain income paid through financial institutions and qualified investment entities that hold or manage foreign financial assets.
When You’d Use Form 1042 (2016)
A withholding agent must file Form 1042 for the 2016 tax year if income was paid to any foreign person, foreign partnership, or foreign financial institution and tax was withheld. The due date is March 15, 2017, or the next business day if a legal holiday falls on that date.
A taxpayer may request an extension using Form 7004, but unpaid tax must still be deposited on time. Amended or late filings are permitted if not due to willful neglect, provided all taxes deposited and taxes paid are fully reported.
Key Rules or Details for 2016
- Filing requirement: Each withholding agent must report tax withheld and all source income paid to foreign individuals, including effectively connected income and certain income from specified foreign financial assets.
- Dual reporting: Both Chapter 3 and Chapter 4 of the Internal Revenue Code section apply, covering withholding tax on foreign entities and FATCA reporting for certain foreign financial institutions.
- Electronic deposits: All federal tax liabilities must be deposited electronically through EFTPS, not by paper check, to ensure accurate reporting of income tax and tax withheld.
- Financial institutions: Not only banks but also investment entities, foreign subsidiaries, and other financial institutions must comply if they hold foreign financial assets or financial accounts.
- Specified foreign financial assets: Taxpayers who have financial assets outside the country or own a significant part of certain foreign companies or trusts must report their foreign financial accounts and other financial assets.
- Foreign Financial Asset Value: Taxpayers must report the highest fair market value of their foreign financial assets, including mark-to-market elections for passive foreign investment companies.
- Payment reporting: All income paid, including eligible deferred compensation items, must be accurately recorded to ensure a reasonable estimate of total tax withheld and unpaid tax.
- Combat tax evasion: The form supports the IRS's efforts to combat tax evasion by ensuring that reporting institutions properly report foreign financial accounts and foreign gifts, as specified under rules for foreign financial assets.
Browse more tax form instructions and filing guides in our Forms Hub.
Step-by-Step Filing Process (High Level)
Step 1: Gather documentation
Collect Forms 1042-S, foreign financial account statements, and all records of income paid to foreign individuals or foreign corporations reported. Include documentation of tax withheld, EFTPS payments, and foreign gifts reported.
Step 2: Obtain your Employer Identification Number
Confirm that the financial institution or withholding agent has a valid employer identification number. If acting as a foreign branch or foreign subsidiary, ensure that the correct EIN or GIIN is used when filing.
Step 3: Complete Section 1 – Record of Federal Tax Liability
Enter the total gross income and the source income paid during each period. The total must match the federal tax liability reported at the end of the return to avoid discrepancies.
Step 4: Complete Section 2 – Reconciliation of Payments
Reconcile foreign financial assets reported, income paid, and tax withheld. Include information on certain foreign financial institutions and specified foreign financial assets.
Step 5: Review, sign, and submit
Verify that all figures match deposits and that income subject to tax has been included. Sign and mail the annual withholding tax return to the Internal Revenue Service by the due date.
Learn more about federal tax filing through our IRS Form Help Center.
Common Mistakes and How to Avoid Them
- Missing or incorrect reporting codes: Withholding agents sometimes fail to include both Chapter 3 and Chapter 4 codes. To avoid this, review each foreign entity type and ensure status codes match the tax treaty or FATCA classification.
- Failing to use EFTPS: Some filers attempt to send paper checks to pay their federal tax liability. To avoid penalties, always use EFTPS for all tax deposits, even for small amounts of unpaid tax.
- Reporting deposits instead of liabilities: Filers often report when the tax was paid rather than when the liability arose. To avoid this mistake, record the liability when the income paid becomes subject to withholding tax.
- Incomplete Reconciliation: Many filers fail to reconcile the financial assets and income of foreign individuals. To avoid issues, confirm that foreign financial accounts, foreign gifts reported, and financial accounts held are reconciled.
- Incorrect asset reporting: Some taxpayers holding financial assets fail to report details of their foreign financial assets. To avoid errors, include all specified foreign financial assets and data from other countries.
- Filing multiple returns: Filing more than one annual withholding tax return for the same entity can be confusing. To avoid duplication, file a single return covering all foreign financial accounts and income paid.
Learn more about how to avoid business tax problems in our guide on How to File and Avoid Penalties.
What Happens After You File
The Internal Revenue Service reviews the Form 1042 submission to confirm the accuracy of the income subject to tax and tax withheld. The IRS reconciles foreign financial accounts, source income, and gross income against reported foreign financial assets. Refunds for overpayment of income tax or federal tax liability are processed after verification has been completed.
Taxpayers must retain all records of financial assets, tax withheld, and reporting institutions for a minimum of three to six years. Notices are issued if unpaid tax or discrepancies are found, especially when financial accounts held by foreign subsidiaries or flow-through entity structures are involved.
FAQs
Do I need to file Form 1042 (2016) if no tax was withheld on my foreign income?
Yes, a withholding agent must file even if no tax was withheld when income paid to foreign individuals or foreign entities is reported to the Internal Revenue Service.
What income tax rules apply to foreign individuals on Form 1042?
Income of foreign individuals includes dividends, royalties, and specified federal procurement payments. Each payment type is subject to income tax based on treaty rates and exemptions.
How are foreign financial assets reported on Form 1042 (2016)?
Foreign financial assets must include financial accounts held offshore, other financial assets, and any foreign gifts reported during the tax year.
How do foreign financial institutions report tax withheld?
Certain foreign financial institutions are required to report tax withheld and income subject to withholding tax for foreign partnerships, foreign subsidiaries, and foreign corporations reported on their returns.
How do I correct an error in my annual withholding tax return?
File an amended Form 1042 (2016) to report tax withheld correctly. Include a written explanation of the correction and confirm all financial assets have been reconciled.
What if I file after the due date?
If the return is filed after the due date but not due to willful neglect, penalties may be reduced. File promptly and pay any unpaid tax to demonstrate good faith compliance.
