What is Form 1042-S? Foreign Person's U.S. Source Income

For Form 1042-S purposes, a foreign person includes:

• Nonresident aliens: Individuals who are not U.S. citizens or resident aliens
• Foreign corporations: Corporations organized under foreign law
• Foreign partnerships: Partnerships not organized in the U.S.
• Foreign trusts: Trusts that are not domestic trusts
• Foreign estates: Estates of decedents who were not U.S. citizens or residents
• Foreign governments: Foreign sovereign nations and their agencies
• International organizations: Entities designated by the President

A foreign person's status is determined by tax residency, not citizenship or physical presence. The "substantial presence test" and "green card test" determine whether an individual is a U.S. tax resident.

Form 1042-S reports U.S. source income subject to withholding, including:

The complete list of income codes is in the Form 1042-S Instructions.

Withholding agents must file Form 1042-S for each foreign person who received U.S. source income subject to withholding. A withholding agent is any person who has control, receipt, custody, disposal, or payment of an item of income of a foreign person.

Common withholding agents include:

• U.S. corporations paying dividends to foreign shareholders
• Banks and financial institutions paying interest
• Employers paying wages to nonresident alien employees
• Businesses paying royalties for intellectual property
• Universities paying scholarships to foreign students
• Real estate managers paying rent to foreign landlords
• Casinos paying gambling winnings to foreign gamblers
• Pension administrators paying distributions to foreign beneficiaries

The statutory withholding rate for payments to foreign persons is 30% under IRC Section 1441. This rate applies unless an exception or reduction is available.

Reductions to the 30% rate may apply when:

• Tax treaty: The recipient's country has a tax treaty with the U.S. that provides reduced rates
• Portfolio interest exemption: Qualified portfolio interest paid to foreign persons is exempt
• Effectively connected income: Income connected with a U.S. trade or business is taxed at graduated rates
• Exempt organizations: Certain foreign governments and tax-exempt organizations

To claim a reduced rate, the foreign person must provide the appropriate Form W-8 (W-8BEN for individuals, W-8BEN-E for entities) documenting their entitlement to the reduced rate.

The United States has income tax treaties with many countries that reduce or eliminate withholding on certain income types. Common treaty rates include:

• Dividends: Often reduced to 5-15% for qualifying shareholders
• Interest: Often reduced to 0-10%
• Royalties: Often reduced to 0-10%
• Pensions: May be fully exempt or taxed only in the residence country

To claim treaty benefits, the foreign person must:

1. Be a resident of a treaty country
2. Provide a valid Form W-8BEN or W-8BEN-E
3. Include the applicable treaty article and rate
4. Certify they meet limitation on benefits (LOB) provisions if required

Foreign persons must provide W-8 forms to document their foreign status and claim any applicable treaty benefits:

• Form W-8BEN: For foreign individuals claiming treaty benefits or exemption
• Form W-8BEN-E: For foreign entities claiming treaty benefits or documenting FATCA status
• Form W-8ECI: For income effectively connected with a U.S. trade or business
• Form W-8IMY: For foreign intermediaries, flow-through entities, and certain U.S. branches
• Form W-8EXP: For foreign governments and international organizations

W-8 forms generally remain valid for three years from the date signed, unless there is a change in circumstances. Withholding agents must maintain valid documentation to apply reduced rates.

Form 1042-S has a unique deadline compared to other information returns:

For complete deadline information, see Form 1042-S Due Dates.