In general, nonresident aliens who receive income in the United States are subject to U.S. taxes. This can be in the form of earned income or other types of payment and you can be sure that the Internal Revenue Service wants to know about it. That’s where the Form 1042-S comes in. It’s important to know what it is and how the process works.
What is Form 1042-S?
The official title of the form is the Foreign Person’s U.S. Source Income Subject to Withholding. It’s used to report the amounts paid to foreign persons that are described under the “Amounts Subject to NRA Withholding and Reporting.” This applies even if you did not withhold any tax.
IRS Form 1042-S is always a required document for reporting money paid to foreign persons (or those who are presumed to be foreign) by a U.S.-based business or institution.
Who Uses Form 1042-S?
Non-US citizens or non-US groups including foreign partnerships, corporations, estates or trusts, use Form 1042-S to report any US-based income they may have received in order to be accurately taxed on that income, according to US standards. In cases where a tax treaty or other exception to taxation exists, the IRS will still require Form 1042-S to be completed.
Types of Payments to Report
Form 1042-S is often used to report scholarships and fellowship grants that foreign students receive from U.S. sources. It can also apply to real estate income, pensions, royalties, and more of the following:
- Gambling winnings
- Dividends from U.S. companies
- Deposit account interest
- Insurance premiums
- Compensation from services conducted in the U.S.
When the 1042-S form is used to report a scholarship or fellowship grant, only the amount over the cost of tuition is reportable.
In cases where there is more than one type of income, multiple forms must be used. For example, if one person received pension income and royalties, you must use a 1042-S for each.
Under the tax laws of the United States, Form 1042-S is not used to report wages for income tax purposes. Instead, Form W-2 should be used.
However, if earnings are exempt from income tax withholding because of a tax treaty (between the earner’s home country and the United States) then Form 1042-S can be used. This is to only report wages in excess of the amount that’s exempt from income tax withholding.
Take the treaty between Morocco and the United States. Moroccans who work as independent contractors in the U.S. are exempt from taxation up to $5,000 in total income. This is only under certain guidelines.
For example, if a Moroccan earns $7,250.19 in income, he would receive a W-2 showing $2,250.19 in income and a 1042-S reporting $5,000. Although Morocco and the United States have a tax treaty, both forms need to be filed.
Filing Form 1042-S
Form 1042-S must be filed with the IRS and a copy should also be sent to the business, student, entity, or employee. It is the responsibility of the withholding agent to complete the form. The withholding agent could be:
- An employer
- Other institution
Form 1042-S should be filed regardless of whether tax is withheld or not.
Furthermore, one form must be completed for each tax rate. This is for any given type of income that’s paid to the same earner.
Although Form 1042-S can be filed the old fashioned way, the IRS does permit electronic filing of the form. The newer method is actually required for withholding agents who have 250 or more forms to submit. Financial institutions are also required to file electronically.
Getting the Boxes Right
Box 1 on Form 1042-S is critical, as this requires the income code that classifies a payment. One form can only have one code. If you’ve received multiple payments from several codes, more than one form must be filed.
Box 3 indicates Chapter 3 or 4. The former is for withholdings that apply to foreign persons, while the latter is for entities that are foreign financial institutions.
In some situations, a Form 1042-S is filled out just for the records of the recipient. It does not need to be filed with the IRS in this situation.
For example, when Box 10 (Withholding Credit) and Box 7 (U.S. Federal Tax Withheld) both show $0, the form does not need to be filed with the IRS. In this situation, Form 1042-S also does not need to be included with the recipient’s tax return.
Filing on Time
Only one 1042-S should be filed per calendar year. It is due on March 15th of the year after the relevant payment was made.
If you need more time to file 1042-S, the IRS will grant an extension. To gain more time, you will need to file another form (Application for Extension of Time to File Information Return, Form 8809). Keep in mind that there is no extension for the payment of tax.
Failure to file a 1042-S on time without an extension or not paying any tax due could result in interest and penalties from Uncle Sam.
1042/1042-T vs. 1042-S
The 1042-S form should not be used for income tax purposes. To report income, Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons) should be used. Withholding agents should file 1042 with the IRS instead of with the employee.
If Form 1042-S is filed in hard-copy format, it must be accompanied by Form 1042-T (Annual Summary and Transmittal of Forms 1042-S). One T Form should be used for each type of S form that is submitted.
If you are still unsure about which forms to file, it’s always best to contact the IRS directly or visit their site at www.IRS.gov. Don’t take a guess and make a costly mistake.