Ensure Your U.S. Accounting Team knows International Tax
The IRS is hiring and training more than 3,000 agents to
enforce its Foreign Account Tax Compliance Act (FATCA). If your US tax team is unfamiliar with
International Tax Issues, you may be putting yourself and your business at
Validating tax information, especially for global partners,
can reduce the likelihood of paying out to “suppliers” who are actually
fraudsters or criminals. The IRS is also making Form 1042-S filings part of the
standard tax return examination. Organizations are generally aware of the need
to report 1099 income, but it seems that many are not so aware of the even
greater compliance required for reporting payments made to foreign entities.
Forms 1042, 1042-S and 1042-T are United
States Internal Revenue Service tax forms
dealing with payments to foreign persons, including non-resident aliens,
foreign partnerships, foreign corporations, foreign estates, and foreign
Every withholding agent or intermediary, whether U.S. or
foreign, who has control, receipt, custody, disposal or payment of any fixed or
determinable, annual or periodic U.S. source income over foreign persons, must
file these forms with the IRS. For example, employers that employ non-resident
aliens (such as foreign workers or foreign students) would need to file a
1042-S Form with the IRS for every non-resident alien they employ and also send
a (completed) copy of that form to the non-resident alien they employ.
Forms 1042 and 1042-S are filed separately. The main
difference between forms 1042 and 1042-S is that form 1042-S is concerned with
payments made to foreign persons, while form 1042 is concerned with determining
how much income will be withheld for tax withholding purposes. Also, Form
1042-S must always be filed together with Form 1042-T, but Form 1042 can
be filed by itself.
Form 1042-S payments are subject to withholding. The
withholding level is:
- 14% if the payee is in F, J, M, or Q status and has
a valid Taxpayer Identification Number,
- 30% otherwise.
Comparison with Forms 1099 and 1099-MISC
Form 1099 is one of several IRS
tax forms used to prepare and file an information return to
report various types of income other than wages, salaries, and tips (for
W-2 is used instead). Form
1099-MISC is a variant of Form 1099 used to report miscellaneous
income. As a general rule, if the person receiving the withholdable payment is
a nonresident alien, Forms 1099 and 1099-MISC should not be used, and instead
Form 1042-S should be used.
One use of Form 1099 is for reporting gross rent on
property. However, for example, if a property manager manages property owned by
nonresident aliens, the manager must issue the nonresident alien owner a Form
1042-S, not a Form 1099.
A common use of Form 1099-MISC is to report amounts paid by
a business to a non-corporate US resident independent contractor for services. If
the independent contractor is a nonresident alien, then the business must
instead use Form 1042-S.
It is important to note that Form 1042 is not merely the
nonresident payee analogue of Form 1099. There are a few important differences:
- Forms 1099 and 1099-MISC usually do not require any
withholding, except in cases where the payee does not provide a correct
Taxpayer Identification Number (TIN), the payee has been reported for
underpayment, or there has been a payee certification failure. In
contrast, Form 1042-S is accompanied by tax withholding.
- The various Form 1099s have reporting thresholds (for
instance, Form 1099-MISC needs to be filed only if $600 or more is being paid).
However, Form 1042-S needs to be filed for any payment.
- There are contexts where no Form 1099 (or any other form)
needs to be filed for resident payees, but Form 1042-S needs to be filed for
nonresident payees. These include scholarship income, as well as payment
for personal services (i.e. payment for services that fall outside a
business−contractor arrangement, such as payment for household help).
Comparison with Form W-2
Form W-2 is issued for work done as an employee to
all US citizens and residents and is issued to foreign employees who either
don't fall under a tax treaty, or whose earnings exceed allowable maximums
of a tax treaty. Form 1042-S is not used only for
- Form 1042-T
- Form 1042-T, also "Annual Summary and Transmittal of
Forms 1042-S", is used to transmit Form 1042-S to the Internal Revenue
Service. Form 1042-T is simply a 1-page summary of Form 1042-S. This form
(along with Form 1042-S) is submitted to the IRS only, not to the non-resident
alien. A separate Form 1042-T must accompany each type of Form
1042-S, but multiple Forms 1042-S (corresponding to more than one payee) can be
grouped under a single Form 1042-T.