What is the Form 1042-S?
The IRS Form 1042-S is used to report various types of payments made to foreign individuals or entities. These payments are subject to reporting and withholding requirements under Chapter 3 of the Internal Revenue Code.
What type of income is subject to Form 1042-S reporting?
Various payment types are subject to reporting on Form 1042-S. Here are four categories of payments that are typically subject to Form 1042-S reporting:
- Nonresident Alien (NRA) Wages: Wages or compensation paid to non-U.S. persons working within the United States are generally subject to Form 1042-S reporting. This includes salaries, bonuses, and other forms of compensation provided to foreign individuals who are not U.S. citizens or residents for tax purposes. For U.S. citizens or residents for tax purposes, these payments are generally reported on the Form W-2.
- Scholarships and Fellowships: Payments made to foreign students or researchers in the form of scholarships, fellowships, or grants are usually subject to Form 1042-S reporting. These payments often include tuition waivers, stipends, or other financial support provided to non-U.S. individuals for educational or research purposes.
- Royalties and Rent: Income earned by foreign individuals or entities from royalties or rental activities in the United States is typically subject to Form 1042-S reporting. This includes payments made for the use of intellectual property, such as patents or copyrights, as well as rental income from real estate located within the United States.
- Dividends and Interest: If a foreign person or entity receives dividends from a U.S. corporation or a qualified foreign corporation or earns interest income from U.S. sources, the withholding agent must report those payments on Form 1042-S. The withholding rate on dividends and interest is generally 30%, unless a lower treaty rate or IRC exemption applies.
- Other Fixed or Determinable Annual or Periodic (FDAP) Income: Various types of FDAP income, such as certain types of prizes or awards paid to foreign individuals or entities are subject to Form 1042-S reporting. As a reminder, FDAP income refers to income that is fixed, determinable, annual, or periodic and is subject to withholding unless an exemption or reduced rate applies under a tax treaty.
It’s important for businesses and organizations to accurately identify and report these types of payments on Form 1042-S to ensure compliance under Chapters 3 and 4 of the Internal Revenue Code. Keep in mind that the IRS can impose penalties for failure to withhold and report correctly, including intentional disregard penalties that are not capped. It is also important to note that unlike Form 1099 reporting, there are no exempt recipients or payment thresholds. If a payment made to a non-US person is in scope, meaning it is a U.S. sourced FDAP payment made to a nonresident alien, then it should generally be reported on a Form 1042-S.
When it comes to Form 1042-S reporting, Forms W-8 play a critical role in withholding and reporting correctly. If you are interested in learning more about how upfront W-8 collection and validation can lead to easier and more accurate Form 1042-S reporting, check out a recap of our joint session with Sovos where Wendy Walker and Jessica Metts discuss how tax documents, like W-8s, play a direct role in Form 1042-S reporting.