Form 1042: Annual Withholding Tax Return for U.S. Source Income of Foreign Persons

Who must file Form 1042?

Any withholding agent or intermediary responsible for receiving, controlling, holding, disposing of, or paying a withholdable payment subject to Chapter 4 withholding or any other amount subject to withholding must file Form 1042 with the IRS.

Each has specific roles and responsibilities outlined in these IRS regulations.

What income is reported on Form 1042?

Form 1042 covers U.S. source income subject to withholding for foreign persons, including:

• Tax withheld under Chapter 3 on income paid to foreign persons, including nonresident aliens, foreign partnerships, corporations, estates, and trusts.
• Tax withheld under Chapter 4 on withholdable payments.
• Tax withheld under Section 5000C on specified federal procurement payments.
• Payments reported on Form 1042-S under Chapters 3 or 4.

Are there any recent changes or updates to Form 1042 for 2024?

The IRS has revised Form 1042 for the 2024 tax year, making the following changes.

• Form 1042 Electronic Filing Requirement - For tax year 2024, Form 1042 must be filed electronically by financial institutions, taxpayers submitting ten or more information returns, and partnerships with over 100 partners. However, foreign withholding agents are administratively exempt from this requirement.
• Discontinuation of the Credit Forward Framework - The credit forward framework is being phased out. Withholding agents who adopted this method before September 11, 2024, can continue using it until December 31, 2024. After this date, it will no longer be available.

Info: The Credit Forward Framework is a financial model that allows individuals or businesses to use unused tax credits in the future to reduce their tax liabilities.

What information is required to complete Form 1042?

Form 1042 includes key details about the payment and withholding:

• Withholding Agent Information, including Employer Identification Number (EIN) and Chapter 3 & 4 status codes
• Federal Tax Liability, reported for each applicable quarter-monthly period (tax liability, not deposits)
• Designation of Tax Liability under Chapter 3 (nonresident withholding) or Chapter 4 (FATCA withholding)
• Reconciliation of U.S. Source FDAP Income
• Potential Section 871(m) Transactions
• Payments by a Qualified Derivatives Dealer (QDD)

Click here to view the step-by-step instructions to complete the 1042 form.

What do Chapter 3 and Chapter 4 codes mean on Form 1042?

Withholding agents must enter both Chapter 3 and Chapter 4 status codes to represent their withholding responsibilities accurately.

• Chapter 3: Under Sections 1441-1443 of the IRC, Chapter 3 mandates a 30% withholding rate on U.S. source Fixed, Determinable, Annual, or Periodical (FDAP) income paid to foreign persons unless a tax treaty specifies a reduced rate or exemption.
• Chapter 4 focuses on the Foreign Account Tax Compliance Act (FATCA) regulations, which require a 30% withholding on payments to foreign financial institutions (FFIs) unless they register as participating FFIs, deemed-compliant FFIs, or exempt beneficial owners.

When is the deadline to file Form 1042 for 2024?

Form 1042 must be filed by March 15 of the year following the calendar year in which the income subject to reporting was paid.

Accordingly, the deadline to file Form 1042 for the 2024 tax year is March 17, 2025. However, there is a separate deadline to deposit the taxes withheld. Check out your 1042 filing deadline for the 2024 tax year.

What are the Form 1042 penalties for late filing or payment?

If you fail to file Form 1042 by the due date, you may incur a penalty of 5% on the unpaid tax per month (or part of a month), up to a maximum of 25%. Check out our article about Form 1042 penalties for more details.

Can you get an extension from filing your Form 1042?

Yes, withholding agents can request an automatic six-month extension by filing Form 7004.

• The extension applies only to the filing deadline and does not extend the due date for any tax payments owed.
• Interest and penalties may still apply to unpaid amounts, even if an extension is granted.

To avoid penalties, withholding agents should ensure that all taxes due are paid on time, even if they request an extension.

How does Form 1042 relate to Form 1042-S?

Form 1042 is used by withholding agents to report the total tax withheld on U.S. source income paid to foreign persons. Form 1042-S reports individual income payments made to foreign persons, including wages, interest, dividends, royalties, and scholarships.

Click here to get a detailed explanation of Form 1042 and 1042-S.

How to meet your 1042 filing requirements?

Starting with tax year 2024 returns, the IRS requires U.S. withholding agents to file Form 1042 electronically instead of submitting paper returns.

With TaxBandits, an IRS-authorized e-file provider, you can quickly and securely e-file Form 1042 while receiving instant status updates on your submission. Our streamlined process enhances accuracy, minimizes errors, and ensures compliance with IRS regulations.

Why wait? E-file Form 1042 today with TaxBandits and simplify your filing experience!