Form 1042-S Basics for AP Professionals

Kelly Conner
February 16, 2023

When it comes to reporting payments to non-United States taxpayers, there is one form to rule them all –  Form 1042-S.

There are over 30 types of 1099 forms used for reporting different types of income to U.S. citizens, such as form 1099-NEC for reporting non-employee compensation or 1099-MISC for reporting other miscellaneous payments made to non-employees from your business. But what’s the protocol for reporting these types of transactions to workers based elsewhere in the world? Form 1042-S covers it all.

The IRS deadline for both paper and electronic filing is March 15, so now is a great time to learn the basics.

What is form 1042-S?

Form 1042-S reports all non-wage U.S.-source payments subject to withholding and paid to non-U.S. payees. It can be thought of as a catchall for a variety of income payments made to non-United States based people or entities.  1042-S reports all U.S. sourced income paid to non-U.S. payees. With Form 1099 for U.S. persons, there are 30 different form types for all forms of income. 1042-S on the other hand encompasses all income, having 429 applicable codes, making it the most complex form.

When it comes to 1042-S, there are two chapters in the internal revenue code to contend with, Chapters 3 and 4.  Chapter 3 is used to collect tax on United States sourced income of non-United States persons. The purpose of Chapter 4 is to ensure U.S. persons pay U.S. tax on worldwide income. Chapter 3 filing is by far the most common, but it’s important to know the distinction between the two.

Which payments are reportable?

The IRS says that fixed, determinable, annual or periodic (FDAP) income is reportable and is defined as all income that is paid except gains from sales of real property or items excluded from gross income tax.  These types of income are:
Fixed – When income is paid in amounts known ahead of time.
Determinable – When there is a basis for figuring the amount to be paid.
Annual – When paid once during the year.
Periodic – When paid from time to time.

The payments for U.S. sourced FDAP are subject to withholding and 1042-S reporting.

Form 1042-S filing best practices

Between the two chapters of the internal revenue code being reported on a single form, the myriad of income, status and exemption codes, filing Form 1042-S can seem like an overwhelming task.

To stay organized, we recommend collecting the 1042-S requirements for each type of income you’re paying – even if it’s exempt from reporting. Having this due diligence in one place will be helpful in the event of an audit.

Next, it’s important to utilize IRS instructions for Form 1042-S, W-9 and W-8‘s. We’d also recommend reading Publication 1187, which covers specifications for e-filing as well as Publication 515 for more information about withholding.

If you are interested in assistance with 1042-S recipient statement delivery, reporting to the IRS, reporting to states or managing your withholding payments and 1042 filings, don’t hesitate to reach out to our experts. It’s not too late to get ahead of the upcoming March 15 reporting deadline.

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Kelly Conner

Kelly Conner is the Director, Product Marketing for Tax & Regulatory Reporting at Sovos. She has been with Sovos for 8 years and is responsible for directing a team that establishes the marketing strategy and direction for Sovos’ 1099, Affordable Care Act, Unclaimed Property, and Statutory Reporting solutions based on industry and client needs. Previously at Sovos, Kelly served as a customer service representative, where she serviced Sovos’ largest customers with unique tax reporting requirements. Kelly holds degrees in Marketing and Communication Studies from the University of Wisconsin-La Crosse.
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