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.




US Source Income IRS remitting and reporting rates and requirements.

IRS Remitting and Reporting requirements for U.S. sourced income securities:
•For a US holder that is W9 certified- no IRS backup withholding tax. They receive a 1099DIV form
•For a US holder without a W9 submitted – 28% IRS backup withholding tax needs to be deducted. They receive a 1099DIV form
•For a non-US holder that is W8 certified – IRS NRA tax will be deducted based on the maximum 30% rate or US treaty rate, if applicable – They recieve a 1042-S
•For a non-US holder without a valid W8 – 30% IRS NRA tax will be deducted. They receive a 1042-S.