Understanding Form 1042-S: Foreign Person's U.S. Source Income Subject to Withholding (2012)
What Form 1042-S Is For
Form 1042-S is an information return that reports income paid to foreign persons (non-U.S. citizens and non-resident aliens) from U.S. sources. Think of it as the international equivalent of Form 1099—it documents money paid and taxes withheld from foreign recipients.
Who uses this form? Withholding agents—any U.S. person or entity (including individuals, corporations, partnerships, or trusts) that pays certain types of income to foreign persons. If you're a U.S. business paying rent to a foreign landlord, interest to an overseas investor, royalties to an international author, or wages to a foreign teacher, you're likely a withholding agent who must file Form 1042-S.
The form serves two main purposes: First, it reports the gross income paid to foreign recipients along with any federal tax withheld at the source (typically 30% unless reduced by a tax treaty). Second, it provides the foreign recipient with documentation they need for their own tax filings, either in the U.S. or in their home country, where they may be able to claim tax credits or treaty benefits.
Form 1042-S covers a wide range of U.S.-source income paid to foreign persons, including interest, dividends, royalties, rents, compensation for services performed in the U.S., scholarship and fellowship grants, pensions, gambling winnings, and income effectively connected with a U.S. trade or business. Even if no tax was withheld—because the income was exempt under a tax treaty or Internal Revenue Code provision—you still must file the form to document the payment. IRS.gov
When You’d Use It (Including Late and Amended Filings)
Standard Filing Deadline
For income paid during calendar year 2012, Form 1042-S must be filed with the IRS by March 15, 2013. You must also furnish copies to the foreign recipients by this same date. This dual deadline means you can't delay sending recipient copies while waiting to file with the IRS—both must happen simultaneously.
Extensions
If you need more time, file Form 8809 (Application for Extension of Time to File Information Returns) on or before March 15, 2013. This grants an automatic 30-day extension. If you need additional time beyond that, you can submit a second Form 8809 before the first extension expires. To extend the deadline for providing copies to recipients, you must send a written request to the IRS Information Returns Branch in Kearneysville, West Virginia.
Electronic Filing Requirement
If you have 250 or more Forms 1042-S to file, you must submit them electronically through the IRS FIRE (Filing Information Returns Electronically) system. This requirement applies separately to original and amended returns. For example, if you file 300 original forms, they must be submitted electronically, but if you later need to file 150 corrections, those can be submitted on paper. IRS.gov
Amended Returns
Discovered an error after filing? You must file an amended Form 1042-S as soon as possible. To correct a paper form: prepare a new Form 1042-S with all correct information, mark an "X" in the AMENDED box at the top of Copy A, and file it with Form 1042-T (Annual Summary and Transmittal). Provide corrected copies to recipients promptly. If your corrections affect totals previously reported on Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons), you must also file an amended Form 1042. Remember: the electronic filing requirement applies to amended returns too—if you're amending 250 or more forms, file electronically.
Key Rules or Details for 2012
Several important rules governed Form 1042-S filings for the 2012 tax year:
Mandatory Reporting Even Without Withholding
You must file Form 1042-S even if you didn't withhold any tax. This happens when income is exempt under a tax treaty, exempt under the Internal Revenue Code, or qualifies for an exception like portfolio interest. The form documents that the payment occurred and why no tax was withheld.
One Recipient Per Form
Each Form 1042-S can report only one recipient. If you paid the same type of income to multiple foreign persons, prepare a separate form for each. Similarly, Copy A filed with the IRS cannot report multiple types of income—use a separate form for each income type (though recipient copies may combine income types).
Companion Filing with Form 1042
If you're required to file Form 1042-S, you must also file Form 1042, the annual withholding tax return that summarizes all Forms 1042-S and remits any taxes withheld. These forms work together—Form 1042-S provides the details, Form 1042 provides the totals.
Artist and Athlete Income Codes
Starting in 2012, the IRS introduced separate income codes for artist and athlete earnings: use Income Code 42 for earnings without a central withholding agreement, and Income Code 43 when there is a central withholding agreement.
Foreign-Targeted Bearer Obligations
A significant 2012 change: interest paid on foreign-targeted bearer obligations issued after March 18, 2012, no longer qualifies as portfolio interest and became subject to withholding and reporting.
Canadian Bank Deposit Interest
If you pay $10 or more of U.S.-source bank deposit interest to a Canadian resident (who is not a U.S. citizen), you must report it on Form 1042-S using Income Code 29 and Exemption Code 02, even though this interest is generally exempt from withholding. IRS.gov
Step-by-Step (High Level)
Step 1: Identify Reportable Payments
Review all payments you made during 2012 to foreign persons. Reportable payments include U.S.-source interest, dividends, rents, royalties, compensation for services performed in the U.S., scholarships, pensions, and gambling winnings. Determine whether each payment required withholding or qualified for an exemption.
Step 2: Gather Documentation
Collect withholding certificates (Forms W-8BEN, W-8ECI, W-8EXP, or W-8IMY) from foreign recipients. These documents establish the recipient's foreign status, taxpayer identification number, country of residence, and any treaty benefits claimed. Without proper documentation, you may need to apply presumption rules and withhold at the full 30% rate.
Step 3: Calculate Withholding
Determine the correct withholding rate for each payment. The default rate is 30% of the gross U.S.-source income, but this may be reduced or eliminated by tax treaty provisions, portfolio interest exemptions, effectively connected income treatment, or other Code exceptions. Document your calculations.
Step 4: Complete Form 1042-S
For each foreign recipient, prepare a separate Form 1042-S. Enter the income code (box 1), gross income amount (box 2), tax rate (box 5), exemption code if applicable (box 6), and federal tax withheld (box 7). Fill in your information as the withholding agent (boxes 11-12) and the recipient's information (boxes 13-16). If payment came through an intermediary like a qualified intermediary or nonqualified intermediary, complete boxes 17-20.
Step 5: Prepare Form 1042-T and Form 1042
For paper filers, prepare Form 1042-T (Annual Summary and Transmittal) to accompany your Forms 1042-S. This transmittal summarizes the number of forms and totals. Also prepare Form 1042, the withholding tax return that reports your total tax liability and remits withheld amounts.
Step 6: File and Distribute
File Copy A of all Forms 1042-S with the IRS (along with Forms 1042-T and 1042) by March 15, 2013. If filing electronically through the FIRE system, follow electronic submission procedures. Furnish Copies B, C, and D to foreign recipients by the same deadline. Retain Copy E for your records.
Common Mistakes and How to Avoid Them
Mistake #1: Reporting Multiple Recipients on One Form
One of the most frequent errors is listing two or more recipients in box 13a. Each Form 1042-S must report only one recipient. Solution: Prepare a separate form for each foreign person who received income, even if they received the same type of payment.
Mistake #2: Missing Required Fields
Forms are often rejected because essential information is missing—recipient name, address, country code, income code, or withholding agent EIN. Solution: Before filing, review every required field. Use the IRS instructions as a checklist to ensure completeness.
Mistake #3: Using Wrong Income or Exemption Codes
Confusion about the 50+ income codes and various exemption codes leads to frequent errors. For example, using Income Code 01 (general interest) when Income Code 29 (deposit interest) is correct, or forgetting that artist/athlete compensation requires specific codes (42 or 43). Solution: Carefully review the income code table in the instructions. When claiming an exemption (entering 00.00 as the tax rate), always enter the corresponding exemption code in box 6.
Mistake #4: Incorrect Money Amounts or Withholding Calculations
Math errors, transposed numbers, or miscalculated withholding rates are common. Solution: Double-check all calculations. Remember that box 2 (gross income) and box 7 (federal tax withheld) must reconcile with the tax rate in box 5. For treaty-reduced rates, verify the treaty article and ensure the recipient provided proper documentation.
Mistake #5: Filing Substitute Forms That Don't Match the Official Format
Using substitute forms that deviate from the official IRS format can result in rejection and penalties. Solution: If you create or purchase substitute Forms 1042-S, ensure Copy A filed with the IRS is an exact copy of the official form's format and content per Publication 1179 specifications.
Mistake #6: Missing the Electronic Filing Threshold
Filers with 250 or more forms who submit paper returns face rejection. Solution: Count your forms early in the filing season. If you meet the 250-form threshold, plan for electronic filing through the FIRE system—don't wait until the deadline approaches. IRS.gov
What Happens After You File
IRS Processing: After you file, the IRS processes your Forms 1042-S and Form 1042, matching the information and verifying that withheld taxes were properly deposited. For electronic filers using the FIRE system, you must check your transmission status within 5 business days—the IRS won't mail error reports for failed electronic submissions.
Recipient Tax Filing: Foreign recipients use Form 1042-S to document U.S.-source income on their U.S. tax returns (Form 1040NR for individuals, Form 1120-F for corporations) if they're required to file. If their tax liability was fully satisfied by withholding and they weren't engaged in a U.S. trade or business, they may not need to file a U.S. return. Recipients may also use Form 1042-S to claim foreign tax credits in their home country.
Record Retention: Withholding agents must retain copies of filed Forms 1042-S—or have the ability to reconstruct the data—for at least 3 years after the reporting due date. These records support your filings in case of IRS inquiries or audits.
Penalties for Non-Compliance: Late or incorrect filings trigger automatic penalties: $30 per form if filed within 30 days late (maximum $250,000, or $75,000 for small businesses), $60 per form if filed 31 days late through August 1 (maximum $500,000, or $200,000 for small businesses), and $100 per form if filed after August 1 or never filed correctly (maximum $1,500,000, or $500,000 for small businesses). Intentional disregard of filing requirements results in a penalty of the greater of $250 per form or 10% of the reportable amount—with no maximum penalty. IRS.gov
Audits and Inquiries: The IRS may examine your withholding practices and Form 1042-S filings as part of a broader compliance review. Maintaining thorough documentation—including withholding certificates, payment records, withholding calculations, and deposit records—is essential for defending your filings.
FAQs
Q1: Do I need to file Form 1042-S if I didn't withhold any tax because of a treaty exemption?
Yes. You must file Form 1042-S to report the payment even when no tax was withheld due to a treaty exemption, Code exemption, or other exception. Enter the exemption code in box 6 and 00.00 as the tax rate in box 5. This documentation is crucial for both IRS records and the foreign recipient's tax filings. IRS.gov
Q2: What's the difference between Form 1042-S and Form 1042?
Form 1042-S is an information return that reports income paid to individual foreign recipients—think of it like a Form 1099 for foreign persons. Form 1042 is the withholding tax return that summarizes all your Forms 1042-S, reports total tax withheld, and remits payment. You file one Form 1042 along with all your Forms 1042-S.
Q3: I'm an individual who made a small interest payment to a foreign friend. Do I have to file?
It depends. Individuals who make payments that aren't part of their trade or business and don't require withholding (such as portfolio interest) are not required to file Form 1042-S. However, if any withholding was required or actually performed, you must file the form regardless of whether the payment was part of your business.
Q4: Can I file one Form 1042-S reporting payments to multiple people?
No. Each Form 1042-S must report only one recipient. Similarly, Copy A filed with the IRS cannot combine multiple types of income—use separate forms for different income types. However, you may use substitute recipient copies (Copies B, C, D) that combine multiple income types if that's more convenient for the recipient.
Q5: I received Form 1042-S as a foreign recipient. What do I do with it?
If you received U.S.-source income and tax was withheld, you may need to file a U.S. tax return (Form 1040NR for individuals, Form 1120-F for corporations) to determine if you owe additional tax or are entitled to a refund. Attach Copy C to your return. You can also use Form 1042-S to claim foreign tax credits when filing your home country's tax return. If the withholding satisfied your entire U.S. tax liability and you had no other U.S. business activities, you may not need to file a U.S. return.
Q6: What if I discover an error after the March 15 deadline?
File an amended Form 1042-S as soon as you discover the error. Prepare a new form with all correct information, mark the AMENDED box, and file it with Form 1042-T (or electronically if you meet the 250-form threshold). Provide corrected copies to recipients promptly. If the error affects your Form 1042 totals, file an amended Form 1042 as well. While penalties may apply for late or incorrect original filings, promptly correcting errors demonstrates good faith compliance.
Q7: Where can I find the specific income codes and exemption codes for 2012?
The complete list of income codes (50 different types) and exemption codes (10 options) appears in the Form 1042-S instructions and on the back of the form itself. Common income codes include 01 (general interest), 06 (dividends), 16-19 (compensation for services), and 28 (gambling winnings). Common exemption codes include 01 (effectively connected income), 04 (treaty exemption), and 05 (portfolio interest). When in doubt, consult the detailed code tables in the instructions or IRS Publication 515. IRS.gov
For More Information
Additional Resources:
- Form 1042-S Instructions (2012): IRS.gov
- Publication 515: Withholding of Tax on Nonresident Aliens and Foreign Entities
- Form 8809: Application for Extension of Time To File Information Returns
- FIRE System: Electronic filing at http://fire.irs.gov
- IRS International Tax Assistance: Call 267-941-1000 (not toll-free)
