1042 vs. 1042S.

IRS Tax form time:

Ever wonder what the difference is between the 1042 and the 1042-S?

Form 1042 is the annual withholding tax return for US source income of foreign persons (it’s for non-residents of the US).

Form 1042-S is a tax form for foreign individuals which reports income from a United States-based source.  In other words, non-residents who conduct some form of business within the United States.  There are 5 copies of the 1042-S, 1 for the IRS, one for the withholding agent and 3 for the recipient.

This can include investments or capital distribution.

The form is sent to the non-residents by the bank or corporation that handles the transaction.

Form 1042-S makes it easy for non-resident individuals to keep track of the income that was generated within the United States as well as how much money was withheld for tax purposes, that would cover for any potential income tax liabilities.

Foreign workers and students who are considered non-resident aliens and are working in the United States are subject to tax withholding.  So they would receive the 1042-S, as an annual information return, to outline any monetary amounts given to them by a US based institution or business (employer or school).

The IRS says that any withholding agent (such as an employer, business, or university) that paid any amount subject to withholding (as described on Form 1042-S on page 4) to a non-resident alien would need to submit a 1042-S information return for every payment recipient.

Some of the payments which are required to be reported on Form 1042-S include but are not limited to: corporate distributions, interest, rents, royalties, compensation for dependent and independent services, pensions and other deferred income, and most gambling winnings.

Some payments are not subject to withholding such as scholarships used for tuition, expense, books, and fees for universities. Also, any service payment that was performed in the person’s country of origin is not subject to withholding. However, these payments are still required to be reported on a 1042-S form. There are more circumstances that are detailed on page 4 of Form 1042-S.

For non-resident alien employees, the form’s purpose is somewhat similar to the W-2 form that employees who are American citizens receive from their employers.

The withholding agent files the 1042-S form with the IRS and sends a copy to the payee for information purposes. However, employment earnings are not the only transaction that the form covers.

Non-resident aliens have different laws that regulate tax withholdings than resident aliens. It is important that employers, businesses, universities, and anyone who pays foreign nationals any type of payment to know the resident status of their payees, for example, for tax purposes, resident aliens are treated the same as US citizens.  You get to be a “resident alien” if you meet the “green card test” or the “substantial presence test” for the calendar year.  If they do not meet either one of those tests, they are considered just to be an alien.

A 1042-S is not required  if any of the amounts paid are to residents of a US possession or territory as long as the payee is a US citizen, resident alien, or US national.

Tax treaties exist between many countries and the US which override the withholding rate to be withheld off a distribution to a non-resident of the US. 

Regardless of whether or not taxes are withheld from the transaction amount, any withholding agent that pays an amount of money to a non-resident alien in the US is still required to provide and file a 1042-S.

Form 1042; http://www.irs.gov/pub/irs-pdf/f1042.pdf

Form 1042-S; http://www.irs.gov/pub/irs-pdf/f1042s.pdf

If you are required to file Form 1042-S, then you must file form 1042, annual withholding tax return for US sourced income of foreign persons.

http://www.irs.gov/pub/irs-pdf/i1042s.pdf

 

 

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Author: Warren Orlans

Welcome to inTAXicating. My name is Warren Orlans and this is my blog. With over 17-years experience in the taxation industry, 11 of them working for the Canada Revenue Agency (CRA), and the rest working in the private sector at large financial institutions responsible for resolving tax issues for corporations and individuals and the Canadian lead for a large US bank on FATCA implementation. My tax career began pretty much out of university at the CRA, in Collections, where I moved up, across, over and up again through their division with stops in Enforcement, Taxpayer Relief (then Fairness), Audit, Directors Liability, Training, Mentoring, GST, GST/HST, Payroll, Corporate Tax, Personal tax, and probably much more. If you have a collections, compliance or audit issue with the CRA, inTAXicating is the place you need to contact. inTAXicating works in strategic partnership with amazing tax lawyers, insolvency practitioners, mortgage brokers, debt counselling experts and much more. When dealing with governments, knowledge is power. We possess strong understanding of government so we know what the next step is before the government does. When you have a collections problem with the CRA, do you hire a graphic artist? No, you get a former collector who trained the staff, and who worked as a resource officer for 5 years. Then you know you are on the right track to resolving your tax problem(s). Others offer suggestions. We offer solutions! info@intaxicating.ca

6 thoughts on “1042 vs. 1042S.”

  1. Hi, does anyone know if Canadian aboriginals who get a green card must then also pay taxes abroad to the US, or does their special rights with the Jay Treat override all of this nonsense?

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  2. My small business (incorporated in Ontario) just received a 1042-S from a US client. Substantially all of the work was done from my office in Canada, with a few meetings at the client site, but they reported all amounts paid to me on the 1042-S. What are my tax filing obligations with the IRS? Obviously, I already reported and paid tax on that income on my Canadian tax return.

    This is the first time that I have received a 1042-S, and I think it is because the client forced me to sign up for a US EIN before they would release payments to me (in addition to the usual W-8BEN form). When I signed up for the EIN, I stated that it was only for W-8BEN purposes.

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  3. Hi Sandy,

    Thanks for your question. Sorry it took me so long to get back to you. I had to do a little digging in order to give you what I believe to be the accurate answer to all of your questions.

    As a Canadian company with s customer in the United States, you were asked to complete a W8-BEN because as “foreign persons” (this is individuals or companies) are subject to a 30% withholding tax on income received from US sources.
    The W8-BEN tells the IRS that:
    1. You are not a US person;

    2. You are the ‘beneficial owner’ of the foreign income being paid to you;

    3. You are a non-resident of the US.

    and through this form you are claiming exemption from the 30%, so you want it all, not just some.
    The instructions and details to fill out the W8-BEN IRS form can be found here. It is pretty straight forward but the one item that is going to throw you is Line 6: “US taxpayer identification number”, or a TIN.
    You do not need an EIN or a TIN if you do not have a physical presence in the US and are not filing taxes in the US.
    In the good old days, the IRS used to accept a BN numbers on Line 7 where it prompted for a “Foreign Tax Identifying number” and “not applicable” on Line 6, but not anymore.
    Notes: A W8-BEN is not required to be completed if you are selling tangible Canadian-made goods into the US.

    As for your requirements, the IRS says “A non-resident alien is subject to tax only on US source income.” See IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. When paying for services, the source is determined by where the services are performed. Services performed outside the US are not taxable (or reportable) to the IRS. In this case a W8-BEN is all that is needed (not EIN).

    Hope this helps!

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    1. Hi Warren,

      I do a lot of business in the US. Most clients get me to fill out the W8-BEN and they pay me the full amount I invoice them. I have one client that has withheld a significant amount of my invoice for tax purposes as they don’t understand the W8-BEN concept. They just sent me a 1042-S showing the amount they withheld, Can I write this off as a loss, or, is there anyway to get this withheld tax?

      Thanks in advance,

      MapGuy

      Like

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