With most United States taxpayers and tax preparers focused on the first tax filing deadline (March 15) for income tax returns and extensions for domestic flow-through entities with a calendar year-end, it is important to keep in mind that annual withholding tax returns are also due on March 15 every year.
In general, when a foreign person earns U.S. source fixed or determinable annual or periodic (FDAP) income, the payor is responsible for withholding U.S. taxes and reporting the amounts on Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons) and Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding).
FDAP income includes interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations and emoluments. Click here to review the types of income that are reportable on Form 1042 and Form 1042-S, general filing requirements and exceptions from filing. Failure to file these forms properly could lead to significant monetary penalties.
WHAT IS NEW
Historically, withholding agents had the option to file Forms 1042 and Form 1042-S by paper. In February 2023, final regulations amending the rules for filing certain return electronically were released.
Pursuant to Treas. Reg. § 301.1474-1, if a financial institution is required to file a Form 1042 and a Form 1042-S, the applicable forms and schedules must be filed electronically. If the electronic filing requirements cause undue hardship, the withholding agents may request a waiver from the Commissioner.
Under these regulations, the electronic-filing threshold for returns required to be filed in calendar-year 2024 (tax-year 2023) was 250 information returns. Beginning calendar-year 2025 (tax-year 2024), the final regulations provide that the electronic-filing threshold should be reduced to 10 returns. With a threshold this low, virtually all withholding agents will be required to e-file the 1042 series.
The new rules initially were set to apply to the current filing season. However, on Feb. 27, 2024, the IRS released Notice 2024-26 which postpones the new e-filing requirement to next year for all U.S. and foreign withholding agents until filing these forms for 2024 (to be filed in 2025). Foreign withholding agents have until calendar-year 2025 to transition to electronic filing (filings to be made in 2026).
With the relief provided by Notice 2024-26, taxpayers and withholding agents now have more time to explore available e-filing options. Businesses that are unsure about whether they will be required to submit annual information returns electronically or unsure about how to file these forms electronically should consult a tax advisor.
FORM 1042 AND FORM 1042-S HIGHLIGHTS
These highlights were originally published in 2021.
- Form 1042 and Form 1042-S are required when a U.S. withholding agent makes FDAP payments to non-U.S. persons.
- Form 1042 is the annual reconciliation summary of all the payments to non-U.S. persons. It can be used to claim a refund of over-withheld tax on the FDAP payments.
- Form 1042-S, used to report the FDAP payments to each non-U.S. person, must be filed together with Form 1042-T (Annual Summary and Transmittal of Form 1042-S). The withholding agent must also issue a copy of Form 1042-S to each respective FDAP recipient.
- The income codes on Form 1042-S are often updated by the IRS every year. Filers should review the codes and the form instructions carefully before preparing the forms.
- Form 1042 filers with a large number of Form 1042-S filings can request a transcript from the IRS to reconcile the total amounts reported on Form 1042 to match with the Form 1042-S filed. For the Form 1042 filers with only a few Form 1042-S filings, it is best practice to file Form 1042 and Form 1042-S together to avoid mismatches. Mismatches or inconsistencies between Form 1042 and Form 1042-S could be identified by the IRS and result in penalty assessments.
DUE DATES AND EXTENTIONS DEADLINES
Form 1042
- DUE DATE: March 15, 2024
- An automatic six-month extension is available for Form 1042. The extension should be requested by filing Form 7004 (this is different than for Form 1042-S).
- Penalties are applicable to Form 1042 and 1042-S as outlined below.
Form 1042-S
- DUE DATE: March 15, 2024
- The filer can request an automatic 30-day extension for the filing deadline by submitting a Form 8809 (Application for Extension of Time). The extension can be requested online through the IRS FIRE System or submitted with a paper application. No signature is required for the automatic 30-day extension. If more time is needed, a second Form 8809 may be submitted before the end of the initial extended due date.
- • Form 1042-S recipient copies must be issued by March 15, which can also be extended by faxing a request letter to the IRS at 877-477-0520 (International 304-579-4105). Additional information can be found in the Form 1042-S instructions.
PENALTIES FOR LATE FILINGS OR MISSING INFORMATION
SPECIFIC PENALTIES | AMOUNTS (RETURN DUE IN 2024) |
|---|---|
LATE FILING OF CORRECT FORM 1042-S WITHIN 30 DAYS AFTER THE DUE DATE | $60 per Form 1042-S, annual cap at $664,500 |
LATE FILING OF CORRECT FORM 1042-S OVER 30 DAYS AFTER THE DUE DATE BUT BEFORE AUGUST 1 | $130 per Form 1042-S, annual cap at $1,993,500 |
LATE FILING OF CORRECT FORM 1042-S AFTER AUGUST 1 OR FAILURE TO FILE CORRECT FORM 1042-S | $330 per Form 1042-S, annual cap at $3,987,000 |
INTENTIONALLY DISREGARD THE REQUIREMENT TO FILE FORM 1042-S | The greater of $660 or 10% of the total gross amount, with no maximum penalty |
FAILURE TO FURNISH CORRECT FORM 1042-S TO RECIPIENT | $330 per Form 1042-S, annual cap at $3,987,000 |
INTENTIONALLY DISREGARD THE REQUIREMENT TO FURNISH FORM 1042-S TO RECIPIENT | The greater of $660 or 10 percent of the total gross amount, with no maximum penalty |
LATE FILING OF FORM 1042 | 5 percent of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25 percent of the unpaid tax |
LATE PAYMENT OF WITHHOLDING TAX | One-half of 1 percent of the unpaid tax for each month or part of a month the tax is unpaid, up to 25 percent of the unpaid tax |
FAILURE TO USE EFTPS (ELECTRONIC FEDERAL TAX PAYMENT SYSTEM) | 10-percent penalty |
For any questions regarding Form 1042 and 1042-S compliance, please reach out to GHJ’s International Tax Practice.
