There are solutions for business owners when it comes to retaining employees and doing their taxes. One of the most important forms to file if you have foreign employees is form 1042-S, and today, we are here to help you master it.
With the maximum total penalty for failing to file and pay taxes at 47.5% of the tax, tax filings are a top priority for many. You wouldn’t want to incur this penalty, especially when the deadline for filing Form 1042-S is approaching.
The IRS subjects non-citizens working in the country to income tax. So, filing Form 1042-S is mandatory if you make payments to foreigners. Each type of income earned by them requires a separate form.
If your organization is currently hiring foreigners, you need to understand how this form works. It will also help if you file it correctly to avoid penalties. Here are the specifics you should know:
The Purpose of Form 1042 S
Form 1042-S reports eligible payments made to foreigners. These payments may include federal procurement payments or eligible deferred compensation items. Distributions of connected income and publicly traded trusts are also part of the income reported on the form.
The IRS advises against using Form 1042-S to report workers’ compensation or wages made to employees. Instead, use Form W-2 to report the wages.
A 1042-S form should also not include payments reported on Form 1099 (non-employment income). The same applies to forms 8288-A (Statement of Withholding on Dispositions by Foreign Persons) and 8966 (FATCA Report).
Who Has to File Income Tax for Foreign Workers?
Any party that the IRS considers a withholding agent must file the form. A withholding agent is any individual (US citizen or non-citizen) with control over an amount subject to withholding. It’s a term that suits an association, trust, partnership, corporation, or individual.
If the withholding agent is an individual, they can only report the payment under certain terms. They need to make the payment as part of their business or trade. And withhold a portion of the amount for income tax purposes.
The IRS expects you to file a 1042-S form even if you didn’t withhold the income tax. You need to indicate that the income qualifies for an exemption under a US tax treaty.
So, if you are an employer that works with foreigners, always report taxes on their income. And as you file Form 1042-S, also file Form 1042. Form 1042 reports the tax returns for amounts held as taxes for foreigners.
Where, When, and How to File Your Form 1040 S
You can either fill out the form electronically or on paper. Whichever mode you choose, do it before March 15. 2024. You should also furnish the document to the recipient of the income before the deadline.
If you are filing it on paper, send it to the address in Form 1042-T instructions. Form 1042-T helps transit paper forms of 1042-S. For electronic filing, use the IRS FIRE system.
You may experience processing delays if you mix up the forms. The IRS may also deny claims for credit or refund for any withheld amounts you reported.
Only ask for an extension if you are certain that it is necessary. Do it before the filing deadline. If approved, you get a 30-day extension.
An extension of time can help you serve recipients copies of the different kinds of forms. While asking for the extension, include your name, TIN, address, and type of return. You should also state a valid reason for the delay.
What Should You Report?
The IRS Form 1042-S should include amounts from US sources earned by foreigners. The report should list these figures whether you haven’t deducted or withheld any amount from the pay. Other types of amounts that you should report include the following:
- Interest on deposits paid to a specific nonresident individual
- Interest on deposits that qualify as payments
- Corporate distributions
- Royalties, rent, and annuities
- Pension distributions, compensation for personal services, and pension distribution
For the IRS to accept the report, the foreigners should include trust fund participants, researchers, teachers, and students. The report may also feature shareholders of regulated investment companies (RIC) as well as real estate investment trusts (REIT).
You can’t include interest from short-term obligations paid to foreigners in the report. The same is the case with bearer obligations and registered obligations targeting foreign markets.
Steps for Completing the Form
It takes only three steps to complete the tax form. The first step is figuring out whether you have a 1042-S filing obligation. If it’s not your first time reporting the income, you are eligible.
The second step is determining whether the payment qualifies as an amount that needs withholding.
And on the final step, complete the boxes with specifics on the figures and amounts. You should also get a separate form for each foreigner working with your company. Fill out their recipient, income, and deductible tax.
IRS 1042-S Form Penalties
The IRS has very strict penalties for failing to file 1042-S. In particular, if you file the correct form late, you risk paying between $60 and $310, depending on the mistake.
You may also face a penalty for failing to furnish the correct form. The maximum penalty for this mistake is $3,783,000.
If the IRS requires you to file the document electronically, don’t hesitate. You may incur penalties unless you have a reason for the error.
Avoid Common 1042-S Form Errors
Only forms with properly-formatted content are easy to process. You should adhere to the requirements for electronic filing. Also, fill in all required fields with the correct inputs.
Use the tax rates allowed by treaties, regulations, or statutes. You should also cross-check the status and exemption codes.
Other common errors to avoid include listing accurate income and using zero to represent the gross income. Fill in any boxes on the form with the correct details.
If you still have an issue with the recipient’s contact details, check them again before submitting the form. As a withholding agent, tax responsibilities lie in your hands. Decide on what’s best for you and respond to the tasks with a clear mind.
Need Help Filing Form 1042-S?
Form 1042-S helps businesses and individuals to look into payrolls minus tax. Without the help of a professional, it will take a lot of time to fill out the blanks. You may also make certain errors and omissions when doing it yourself.
Make ERC Today your trusted partner for expert IRS-related or tax return issues. ERC Today has roots across the country. Apply today to take advantage of ERC Today’s employee retention credit.