Instructions for Filling Out Form 1042

This document offers a comprehensive guide to completing Form 1042, the Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, for the year 2023. It covers general instructions, specific steps for filling out the form, deposit requirements, interest and penalties, avoiding common errors, and amending the form if necessary.

In this article, we'll provide information on Form 1042 and a step-by-step guide on how to fill it out, keeping it straight to the point.

What is Form 1042?

Form 1042 is the Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. It is used to report tax withheld under chapters 3 and 4 on certain income of foreign persons, such as nonresident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts. The form also reports tax withheld pursuant to section 5000C on specified federal procurement payments, tax withheld under section 877A on payments of eligible deferred compensation items or distributions from nongrantor trusts to a covered expatriate, and payments reported on Form 1042-S under chapters 3 or 4. The purpose of Form 1042 is to ensure compliance with the Internal Revenue Code requirements for withholding and reporting on U.S. source income paid to foreign persons.

Who Must File Form 1042?

Every withholding agent or intermediary who receives, controls, has custody of, disposes of, or pays a withholdable payment (to which chapter 4 withholding applies) or an amount subject to withholding must file Form 1042 for the preceding calendar year, unless an exception to filing applies. This includes any publicly traded partnership (PTP) or nominee making a distribution of effectively connected taxable income (ECTI) under section 1446, or any entity required to report a distribution on Form 1042-S that is subject to withholding under section 1445.

Form 1042 Tax Filing Deadlines and Due Dates

• March 15, 2024: The due date for mailing Form 1042 to the Internal Revenue Service for the tax year 2023.
• Extensions: If more time is needed to file Form 1042, Form 7004 can be submitted for an automatic extension of time to file. However, this does not extend the time for payment of tax.

Form 1042 Late Payment Penalty

If Form 1042 is filed late, the penalty amount is dependent on how delayed the form is filed.  It is advised to refer to the IRS's general penalty guidelines or the specific sections of the tax code governing penalties for late payments related to Form 1042.

Step-by-Step Instructions for Form 1042

Here are the step-by-step instructions for filling out Form 1042:

1. Rounding Off to Whole Dollars: Round cents to the nearest whole dollar amount for all entries.
2. Employer Identification Number (EIN): Enter the withholding agent's EIN. If filing as a QI, WP, or WT, enter the respective EIN.
3. Address: Include the complete address of the withholding agent.
4. Chapter 3 and 4 Status Codes: Enter the appropriate status codes for the withholding agent from the provided list.
5. Section 1 - Record of Federal Tax Liability: Report the tax liability for each quarter-monthly period, including adjustments for overwithholding or underwithholding.
6. Section 2 - Reconciliation of U.S. Source FDAP Income: Reconcile the amount of U.S. source FDAP income reportable under chapter 4 with the total amount reported on all Forms 1042-S.
7. Section 3 - Potential Section 871(m) Transactions: Indicate if any payments were made under potential Section 871(m) transactions.
8. Section 4 - Dividend Equivalent Payments by a QDD: If applicable, check the box, enter the EIN, and attach Schedule(s) Q (Form 1042) for each QDD.
9. Third Party Designee: If you want to authorize someone to discuss the form with the IRS, fill out this section.
10. Paid Preparers: If the form is completed by a paid preparer, they should complete the "Paid Preparer Use Only" section.
11. Amended Return: If filing an amended return, check the "Amended Return" box and attach a statement explaining the changes.

How to Submit Form 1042

To submit Form 1042, complete all required sections based on the type of income and withholding applicable, ensuring accurate reporting of federal tax liability, U.S. source FDAP income, and any adjustments for overwithholding or underwithholding. File the form by the due date, March 15, 2024, for the tax year 2023. If necessary, file Form 7004 for an automatic extension of time to file. Remember to reconcile the amounts reported on Form 1042 with those reported on all Forms 1042-S to avoid discrepancies, and if amending a previously submitted form, check the "Amended Return" box, complete the entire form again, and attach a statement explaining the changes.

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