What is Form 1042-S?
Form 1042-S is a year-end federal tax form that US-based individuals, businesses, and institutions must file to report the amounts they paid to non-citizen, non-resident workers. For example, if you are an American-based company and you work with a graphic designer in the Ukraine and a content writer in London, you’ll need to complete Form 1042-S for each worker at the end of each year.
There is no minimum payment amount for filing Form 1042-S. (In comparison, you only need to provide a Form 1099-NEC to US-citizen freelancers if you pay them at least $600). In addition to payments for freelance work, each of the following types of income requires a 1042-S form:
- Royalties
- Scholarships
- Dividends paid by American corporations
- Income from real estate
- Pension income
- Gambling winnings
- Normal income (in some cases)
- Interest on deposits
- Compensation for personal services performed in the U.S.
- Insurance premiums
This article is part of our guide on independent contractor taxes.
Who needs to file Form 1042-S?
Every US person, business, or institution that provides income to non-citizen individuals must file a Form 1042-S, even if ultimately the payments they made were exempt from being taxed because of a treaty or taxation exception.
The form applies to all payments made to non-resident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts that are subject to tax withholding.
On top of filing Form 1042-S with the IRS, your company must also provide the completed form to the individuals who received the payments. The most accurate way to understand who should your company summit 1042-S or 1099 tax forms is based on whether those individuals or vendors submit a W-9 or W-8BEN.
What Information Does Form 1042-S Contain?
Form 1042-S collects a variety of details about the payment and the recipient to ensure accurate reporting to the IRS. The form includes:
- Recipient information: Name, address, and taxpayer identification number (TIN) or foreign tax identification number.
- Income codes: Specific codes that categorize the type of income being reported, such as compensation for services, royalties, or dividends.
- Exemption codes: Codes that explain any exemptions applied to the withholding, often based on tax treaties.
- Gross income amount: The total amount of income paid to the foreign person.
- Withholding amount: The amount of U.S. tax withheld from the payment.
- Country codes: The country of residence of the recipient and the country where the income was sourced.
- Tax rate: The rate at which the tax was withheld from the income.
How do you submit Form 1042-S?
Your company needs to submit Form 1042-S for all of the relevant recipients by March 15th. The form should reflect payments made to the individual in the year prior.
The IRS specifies that you must submit a separate form for:
- Each recipient regardless of whether or not you withheld tax.
- Each tax rate (if you withheld at more than one tax rate) of a specific type of income that you paid to the same recipient.
- Each type of income that you paid to the same recipient.
Although you can choose to fill out the forms electronically or on paper, you must submit them electronically if you are submitting them on behalf of 250 or more recipients.
Form 1042 vs. 1042-S vs. 1099: What are the differences?
While Form 1042-S is used for reporting income paid to foreign persons, there are other related forms that companies need to be aware of:
- Form 1042: This form is the annual summary tax return that accompanies the 1042-S forms. It consolidates all 1042-S forms and company files, summarizing total payments and withholdings. Form 1042 is to Form 1042-S what Form 1096 is to Form 1099.
- Form 1042-S: This is used to report income paid to foreign persons that is subject to withholding. Each payment type and tax rate for each recipient requires a separate Form 1042-S.
- Form 1099: These forms, such as 1099-NEC and 1099-MISC, are used to report various types of income paid to U.S. persons. The 1099-NEC form, for example, reports payments of $600 or more to independent contractors within the U.S.
What are the penalties for not submitting on time?
Failing to file complete and correct 1042-S forms for each foreign person your company pays could result in a penalty, unless you are able to prove that the failure was due to reasonable cause and not willful neglect.
In 2021, the penalty for filing the form less than 30 days late is around $50 per form. If you submit the forms more than 31 days late—up until August 1—the penalty rises to $110 per form. If you submit the forms after August 1, the penalty hits $280. And if the IRS determines you intentionally didn’t file the forms, the penalty can increase to $560 per form, or 10% of the total amount of items required to be reported, with no maximum penalty.
Late reporting doesn’t have to result in a penalty. If you need more time to file your Form 1042-S, you can request an extension from the IRS. To gain more time, you need to submit Form 8809 (Application for Extension of Time to File Information Returns) by March 15.
Be Prepared to Submit the Correct Tax Forms for Your Foreign Freelancers
As the skills gap widens, strategic organizations have set their sights on freelancers and independent contractors. When borders—and the tax codes they contain—aren’t a limiting factor, you have the potential to work with the best talent all over the world.
Working with foreign freelancers can give you access to pre-vetted, experienced, qualified talents who are ready to dive into work and support organizational agility.
By being aware of the reporting requirements you face and preparing your organization to fulfill them, bureaucratic processes don’t have to hold you back.