Forms 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, are due on March 15, 2022. As withholding agents prepare these forms, they should keep in mind the common errors set forth by the IRS in the instructions to each form.
Here are a few key reminders:
- Include all required information:
– Withholding agent information in Boxes 12a through 12i (name, address, chapter 3 and chapter 4 status codes, and the employer identification number (EIN), Qualified Intermediary EIN (QI-EIN), Withholding Partnership EIN (WP-EIN), or Withholding Trust EIN (WT-EIN)) and confirm that this information is correct.
– Recipient information in Boxes 13a through 13e and 13h (name, address, U.S. TIN (if any), Global Intermediary Identification Number (GIIN)(if any), and country code).
– Unique form identifier and information in Boxes 1, 2, 3, 7a, 12a, 12b, 12c, 12d, 12f, 12h, 12i, 13a, 13b, 13c, and 13d.
- When reporting an amount subject to chapter 3 withholding, you must enter information in Boxes 12b, 12c, and 13f.
- When reporting a chapter 4 withholdable payment in Box 2, you must enter information in Boxes 4a, 4b, and 13g.
- If withholding was not required on a chapter 4 withholdable payment, you must enter 00.00 in Box 4b and provide an exemption code in Box 4a.
- When you have a chapter 4 withholdable payment that is an amount subject to chapter 3 withholding, then you must enter 00.00 in Box 4b and report information in Boxes 3a and 3b.
- QIs, WPs, WTs, that are pool reporting only their direct account holders must enter a chapter 3 status code in Box 13f or a chapter 4 status code in Box 13g.
- When you have a recipient in Box 13 or entity in Box 15 that is a participating FFI, registered deemed-compliant FFI, sponsored FFI, direct reporting NFFE, or sponsored direct reporting NFFE, then you must enter a GIIN in Box 13h or 15e.
- Double check your income, status, and exemption codes! Only use those listed in the instructions.
- Double check your tax rates to be sure that they are allowed by statute, regulations, or treaty. Do not blend rates! If more than one rate applies, then multiple forms may be required.
- Box 2 (gross income) must be greater than zero.
- Do not list more than one joint owner as a recipient in Box 13a.
- Double check your country codes in Boxes 13b and 15f. They are mandatory and must be correct. Do not use ‘US’ unless the intermediary in Line 15 is a U.S. branch that is not treated as a U.S. person. Do not use ‘UC’ or ‘OC’, except when the country of residence does not appear on the list of IRS Country Codes or where you made a payment to an international organization (e.g., the United Nations).
- Cross reference your exemption codes in Boxes 3a and 4a with other recipient information! The exemption codes must identify the proper tax status for the type of income paid to the recipient. If you are using exemption code 15, because the payee is not subject to chapter 4 withholding, then the chapter 4 status code of the recipient must correspond with this exemption. If you are using exemption code 04, because the income is exempt under a tax treaty, then the country code in Box 13b must be that of a country with which the United States has entered into an Income Tax Treaty.
- Withholding agents that are US. government entities or U.S. tax-exempt entities, including colleges and universities, and other U.S. tax-exempt entities under the Internal Revenue Code other than under section 501(c) may use chapter 3 status code 20 (tax exempt organization (section 501(c) entities) for box 12b.
- Withholding agents should select the chapter 3 status code that most closely applies with their status based on the available codes. A U.S. financial institution with 01 as its chapter 4 status code, is a corporation and should use the chapter 3 status code 15, for corporation.
As a general reminder, always review the instructions for each form and relevant IRS guidance and publications before filing. Here some helpful links:
- 2021 Instructions for Form 1042, https://www.irs.gov/pub/irs-pdf/i1042.pdf
- Instructions for Form 1042-S, https://www.irs.gov/pub/irs-pdf/i1042s_21.pdf
- 2021 Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, https://www.irs.gov/pub/irs-pdf/p515.pdf
- 2021 Publication 1187, Specifications for Electronic Filing of Forms 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, https://www.irs.gov/pub/irs-pdf/p1187.pdf
- Valid Tax Rate Table, https://www.irs.gov/instructions/i1042s#en_US_2022_publink1000307233
- IRS Country Codes, https://www.irs.gov/countrycodes
- United States Income Tax Treaties, https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z
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