Who must file 1042?

Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons) serves as the primary reconciliation tool for tax withheld on payments to foreign persons, including nonresident aliens, foreign corporations, partnerships, trusts, and estates.

While Form 1042-S reports specific payments to specific recipients, Form 1042 reports the aggregate tax liability of the withholding agent.

1. Introduction

Any person or entity considered a "withholding agent" that receives, controls, has custody of, disposes of, or pays a "withholdable payment" (Chapter 4) or an amount subject to withholding (Chapter 3) must generally file Form 1042.

This requirement applies to both U.S. and foreign persons. A common misconception is that if no tax was withheld (due to a treaty or exception), no return is needed. In reality, if you are required to file Form 1042-S to report a payment, you must almost always file Form 1042 to summarize those payments.

2. Core Explanation

The filing requirement is triggered by your status as a Withholding Agent or an Intermediary regarding U.S. source income.

A. The "Even If" Rule

You must file Form 1042 if you are required to file Form 1042-S, even if:

• No tax was withheld because of a tax treaty exemption.
• No tax was withheld because of a specific Code exception (e.g., portfolio interest).
• You are filing Form 1042-S electronically and assume the IRS "already knows."

B. Specific Entities Required to File

1. Withholding Agents: Any person, U.S. or foreign, that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding (e.g., rents, royalties, dividends, interest).
2. Intermediaries:
   • Qualified Intermediaries (QIs): Must file to report pooled income and withholding.
   • Non-Qualified Intermediaries (NQIs): Must file if they are required to report payments or if they failed to provide sufficient documentation to an upstream withholding agent.
3. Flow-Through Entities:
   • Withholding Foreign Partnerships (WPs) & Trusts (WTs): Must file.
   • Publicly Traded Partnerships (PTPs): Must file to report withholding under Section 1446 on Effectively Connected Taxable Income (ECTI).
4. Section 1445 (FIRPTA): Entities required to report distributions subject to FIRPTA withholding on Form 1042-S.

C. Electronic Filing Requirements (2025/2026 Updates)

The rules for how you must file have recently tightened, though temporary relief exists for foreign filers.

• The 10-Return Threshold: Under Treasury Decision 9972, filers must aggregate all information returns (Forms W-2, 1099, 1042-S, etc.). If the total is 10 or more, you must file Form 1042 electronically.
• Financial Institutions: Must always e-file, regardless of volume (unless the foreign exception applies).
• Administrative Exemption (Notice 2024-26): For tax year 2024 (filed in 2025) and tax year 2025 (filed in 2026), foreign withholding agents (including foreign financial institutions) are administratively exempt from the e-filing requirement and may continue to file on paper. U.S. withholding agents do not get this automatic relief.

Audit and Practitioner Consideration

The IRS aggressively polices Chapter 3 (NRA Withholding) and Chapter 4 (FATCA) compliance.

1. Personal Liability (Section 1461):

   • The withholding agent is personally liable for any tax that should have been withheld. If you fail to withhold, the IRS can collect the tax, interest, and penalties directly from you, even if the payee actually owes the tax.
   • Defense: If you can prove the payee paid the tax (via Form 4669), you may be relieved of the tax liability, but not the interest or penalties for failure to withhold/file.

2. Statute of Limitations Trap:

   • If you fail to file Form 1042, the statute of limitations on assessment never begins to run. The IRS can audit that year indefinitely.
   • Best Practice: Many practitioners advise filing a "zero" Form 1042 if there is any ambiguity about whether payments were reportable, simply to start the statute clock.

3. Documentation (W-8 Series):

   • You must hold valid documentation (Form W-8BEN, W-8BEN-E, W-8IMY, etc.) prior to making the payment.
   • Audit Risk: If documentation is missing or invalid at the time of payment, the IRS applies "presumption rules," often forcing a 30% withholding rate (gross-up) which becomes the agent's liability.

4. One Big Beautiful Bill Act (OBBB):

   • While the OBBB (July 2025) introduced changes to R&E capitalization (Section 174) and clean energy incentives, it generally did not alter the administrative filing thresholds for Form 1042. Practitioners should rely on existing Chapter 3/4 regulations unless specific technical corrections are issued.

3. Summary

• Who: Any person (US or foreign) with control over payment of US source income to foreign persons.
• Trigger: Required if you must file Form 1042-S, even if tax liability is zero.
• Format: Electronic filing is mandatory if you file 10+ aggregate information returns, with a temporary exemption for foreign filers through 2026.
• Deadline: March 15th of the year following the payment.

4. Suggested Next Steps

• Review: Check your total count of information returns (W-2, 1099, 1042-S) to determine if you triggered the electronic filing mandate.
• File: Submit Form 1042 by March 16, 2026 (since March 15 is a Sunday).
• Distribute: Ensure Form 1042-S copies are provided to recipients by the same deadline.
• Extend: If you cannot file on time, file Form 7004 for an automatic 6-month extension.