Ten most common errors for completing the Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding
The Internal Revenue Service (IRS) continually develops strategies to build a tax administration to effectively deal with globalization and the international community.
In an effort to enhance the processing of Chapter Three Withholding (CTW) Program information returns, the IRS is providing withholding agents with the following list of the ten most common errors found during the processing of Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. This communication alert is part of ongoing efforts to develop enhanced computer data consistency and validity controls to ensure the integrity, accuracy and completeness of Forms 1042-S submitted by Withholding Agents.
Top Ten Form 1042-S Processing Errors:
Invalid income code entered in Box 1 (Income Code field). An entry is required in this box. The income code must accurately reflect the type of income paid. DO NOT leave blank or enter “00.”
Invalid tax rate entered in Box 5 (Tax Rate field). An entry is required in this box. Enter the correct rate of withholding that applies to the income reported in Box 2 (Gross Income field) or Box 4 (Net Income field), as appropriate. Enter the tax rate using the following format: two digits, a decimal, and two digits (e.g., 04.95 for 4.95% or 30.00 for 30%).
U.S. federal tax withheld reported in Box 7 (U.S. Federal Tax Withheld field) is inconsistent with a “valid tax rate.” This “math error” may result in the issuance of an error notice.
Recipient code “20” (Unknown recipient) is entered in Box 12 (Recipient Code field) when a recipient’s name appears in Box 13 (Recipient’s Name and Address field). In general, an “unknown recipient” is a recipient from whom no documentation, or incomplete documentation, has been received by a withholding agent. An unknown recipient is always subject to withholding at the maximum applicable rate.
The recipients name entered in Box 13 (Recipient’s Name and Address field) is inconsistent with the recipient code entered in Box 12 (Recipient Code field). For example, the “XYZ Pension Fund” is reported as an “Individual” (Recipient code “01”).
Box 14 (Recipient’s U.S. Taxpayer Identification Number (TIN)) does not report a TIN when exemption code “01” is entered in Box 6 (Exemption Code field). If an account holder (recipient) does not provide a TIN on Form W-8ECI, Certificate of Foreign Person’s Claim for Exemption From Withholding on Income Effectively Connected with the Conduct of a Trade or Business in the United States, the form is invalid. DO NOT enter exemption code “01” in Box 6. Withhold tax at a rate of 30%.
A Qualified Intermediary Employer Identification Number (QI-EIN) is entered in Box 14 (Withholding Agent’s EIN field) and Box 12 (Recipient Code field) reports a recipient code other than “12” (Qualified Intermediary). In addition, the QI EIN checkbox in Box 14 is checked and the Withholding Agent EIN is not a QI-EIN. Note: A QI-EIN is for QI reporting purposes only and should not be used on any tax return other than Forms 1042, 1042-T, 1042-S or 945.
Country of residence entered in Box 15 (Recipient’s Country of Residence for Tax Purposes field) is inconsistent with the country code entered in Box 16 (Recipient’s Country Code field). The country code used must be a valid code taken from the Country Code Table. The use of “OC” or “UC” will generate an error condition. If a recipient is claiming treaty benefits, the country code can never be “OC” or “UC.”
Boxes requiring an entry are left blank.
For all amount fields report in dollars only and right-justify. You may round off cents to whole dollars. To round, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar (for example, $1.39 becomes $1 and $2.50 becomes $3).
Pub 515, Withholding of Tax on Nonresident Aliens & Foreign Corporations
Pub 519, U.S. Tax Guide for Aliens
Pub 901, U.S. Tax Treaties
Pub 1187, Specifications for Filing Forms 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, Electronically or Magnetically.
Pub 1281, Backup Withholding for Missing and Incorrect Name/Tin(s)
Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons
Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding
Form 1042-T, Annual Summary and Transmittal of Forms 1042-S
Income Codes, Exemption Codes, and Recipient Codes
Box 1. Enter the appropriate income code.
Code: Interest Income
- 01: Interest paid by U.S. obligors - general
- 02: Interest paid on real property mortgages
- 03: Interest paid to controlling foreign corporations
- 04: Interest paid by foreign corporations
- 05: Interest on tax-free covenant bonds
- 29: Deposit interest
- 30: Original issue discount (OID)
- 31: Short-term OID
- 33: Substitute Payment - Interest
Code: Dividend Income
- 06: Dividends paid by U.S. corporations - general
- 07: Dividends qualifying for direct dividend rate
- 08: Dividends paid by foreign corporations
- 34: Substitute Payment - Dividends
Code: Other Income
- 09: Capital gains
- 10: Industrial royalties
- 11: Motion picture or television copyright royalties
- 12: Other royalties (e.g., copyright, recording, publishing)
- 13: Real property income and natural resources royalties
- 14: Pensions, annuities, alimony, and/or insurance premiums
- 15: Scholarship or fellowship grants
- 16: Compensation for independent personal services
- 17: Compensation for dependent personal services1
- 18: Compensation for teaching1
- 19: Compensation during studying and training1
- 20: Earnings as an artist or athlete
- 24: Real estate investment trust (REIT) distributions of capital gains
- 25: Trust distributions subject to IRC section 1445
- 26: Unsevered growing crops and timber distributions by a trust subject to IRC section 1445
- 27: Publicly traded partnership distributions subject to IRC section 1446
- 28: Gambling winnings
- 32: Notional principal contract income3
- 35: Substitute Payment - Other
- 36: Capital Gains Distributions
- 37: Return of Capital
- 50: Other income
Box 6. If the tax rate entered in box 5 is 0%, you must generally enter the appropriate exemption code from the list below (but see the Caution below.)
Code: Authority for Exemption
- 01: Income effectively connected with a U.S. trade or business
- 02: Exempt under an Internal Revenue Code section (income other than portfolio interest)
- 03: Income is not from U.S. sources
- 04: Exempt under tax treaty4
- 05: Portfolio interest exempt under an Internal Revenue Code section
- 06: Qualified intermediary that assumes primary withholding responsibility
- 07: Withholding foreign partnership or withholding foreign trust
- 08: U.S. branch treated as a U.S. person
- 09: Qualified intermediary represents income is exempt
Caution: See the instructions for box 6 on page 13 for information on additional codes (“00” and “99”) that may be required.
Box 12. Enter the appropriate recipient code
Code: Type of Recipient
- 01: Individual2
- 02: Corporation2
- 03: Partnership other than a withholding foreign partnership2
- 04: Withholding foreign partnership or withholding foreign trust
- 05: Trust
- 06: Government or international organization
- 07: Tax-exempt organization (IRC section 501(a))
- 08: Private foundation
- 09: Artist or athlete2
- 10: Estate
- 11: U.S. branch treated as U.S. person
- 12: Qualified intermediary
- 13: Private arrangement intermediary withholding rate pool – general5
- 14: Private arrangement intermediary withholding rate pool – exempt organizations5
- 15: Qualified intermediary withholding rate pool – general5
- 16: Qualified intermediary withholding rate pool – exempt organizations5
- 17: Authorized foreign agent
- 18: Public Pension Fund
- 20: Unknown recipient
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.
1 If compensation that otherwise would be covered under Income Codes 16-19 is directly attributable to the recipient’s occupation as an artist or athlete, use Income Code 20 instead.
2 If Income Code 20 is used, Recipient Code 09 (artist or athlete) should be used instead of Recipient Code 01 (individual), 02 (corporation), or 03 (partnership other than withholding foreign partnership).
3 Use appropriate Interest Income Code for embedded interest in a notional principal contract.
4 Non-U.S. source income paid to a nonresident alien is not subject to U.S. tax. Use Exemption Code 03 when entering an amount for information reporting purposes only.
5 May be used only by a qualified intermediary.