Form 1042-S: Foreign Person's U.S. Source Income Subject to Withholding
Complete guide to Form 1042-S for US expats receiving U.S. source income as non-resident aliens, and for withholding agents making payments to foreign persons.
Form 1042-S is the form that foreign persons receive when they earn US source income. If you are a non-resident alien, a foreign corporation, or a foreign partnership that receives dividends, interest, royalties, or compensation from US sources, you will receive Form 1042-S from the US payer. For Americans abroad, this form is most relevant when you have foreign pension funds or investment vehicles that hold US assets — the 1042-S is issued to the foreign entity, and the tax implications flow through to you.
What Is Form 1042-S?
Form 1042-S is an information return filed by US withholding agents to report:
- Income paid to foreign persons
- Amounts withheld under Chapter 3 (NRA withholding)
- Amounts withheld under Chapter 4 (FATCA withholding)
- Tax treaty benefits claimed
Who Receives Form 1042-S?
You receive Form 1042-S if you are a foreign person and you received:
- Dividends from US stocks
- Interest from US bonds or bank accounts
- Royalties from US intellectual property
- Rent from US real estate
- Compensation for services performed in the US
- Pensions or annuities from US sources
- Original issue discount (OID)
Not reported on 1042-S: US source income effectively connected to a US trade or business (reported on Form 1042 instead), portfolio interest that is exempt from withholding, and certain other exempt income.
Who Must File Form 1042-S?
The withholding agent (the US payer) must file Form 1042-S. This includes:
- US corporations paying dividends to foreign shareholders
- US banks paying interest to foreign depositors
- US employers paying wages to non-resident alien employees
- US investment funds making distributions to foreign investors
- US pension plans making payments to foreign beneficiaries
Withholding Agent Obligations
- Determine status: Is the recipient a US person or a foreign person?
- Obtain documentation: Request Form W-8BEN (foreign individuals), W-8BEN-E (foreign entities), or W-8ECI (effectively connected income)
- Withhold tax: Withhold at 30% (or treaty rate) at the time of payment
- Deposit tax: Deposit withheld tax with the IRS using Form 1042
- File Form 1042-S: Report payments and withholding to the IRS and the recipient
- File Form 1042: Annual summary of all withholding and deposits
Withholding Rates
Default Rate: 30%
Unless an exception or treaty applies, the default withholding rate on US source income paid to foreign persons is 30%.
Tax Treaty Reductions
The US has tax treaties with 60+ countries that reduce or eliminate withholding on certain types of income:
| Income Type | Typical Treaty Rate | Typical Non-Treaty Rate |
|---|---|---|
| Dividends | 5-15% | 30% |
| Interest | 0-10% | 30% |
| Royalties | 0-10% | 30% |
| Pensions | 0-15% | 30% |
Portfolio Interest Exemption
Portfolio interest paid to foreign persons is generally exempt from withholding. Requirements:
- The debt is in registered form
- The foreign person certifies its foreign status (Form W-8BEN)
- The recipient is not a bank or financial institution
- The interest is not effectively connected to a US trade or business
Form 1042-S for Expats
Foreign Pension Funds
If you have a foreign pension (e.g., UK SIPP, Australian superannuation) that holds US stocks or bonds:
- The pension fund receives Form 1042-S from the US payer
- Tax is withheld at source (usually 15% under the treaty, or 30% if no treaty)
- The pension fund reports the income to you
- You may be able to claim a foreign tax credit on your US return for the withheld tax
Foreign Investment Accounts
If you hold US securities through a foreign brokerage:
- The foreign brokerage receives Form 1042-S
- US tax is withheld before the dividend or interest reaches your account
- You report the net income on your US return
- You claim a foreign tax credit for the US tax withheld
Working in the US Temporarily
If you are a non-resident alien performing services in the US:
- Your US employer withholds tax and issues Form 1042-S
- If you qualify under a treaty (e.g., the teacher/researcher article), you may claim an exemption
- File Form 1040-NR to claim treaty benefits or a refund
Filing Deadlines
For Withholding Agents
- Form 1042-S: Due March 15 following the calendar year
- Form 1042: Due March 15 following the calendar year
- Tax deposits: Monthly or semi-weekly, depending on volume
For Recipients
- Form 1042-S is provided by the withholding agent by March 15
- Recipients do not file Form 1042-S
- Recipients may need to file Form 1040-NR to claim refunds or report additional income
When to Get Help
Form 1042-S issues are generally handled by the withholding agent, but you may need assistance if:
- You believe withholding was incorrect
- You want to claim a refund of over-withheld tax
- You have a foreign pension or investment account holding US assets
- You need to optimize the foreign tax credit for US tax withheld at source
FileAbroad's Complex Expat Return includes foreign tax credit optimization, withholding analysis, and treaty benefit claims. Start your free intake to discuss your situation.
Frequently Asked Questions
Who receives Form 1042-S?
Form 1042-S is issued to foreign persons (non-resident aliens, foreign partnerships, foreign corporations, foreign trusts) who receive US source income subject to withholding under Chapter 3 of the Internal Revenue Code. Common recipients include foreign contractors, foreign investors receiving US dividends or interest, and foreign pension funds with US assets.
What types of income are reported on Form 1042-S?
Form 1042-S reports: dividends from US corporations, interest from US obligors, royalties from US sources, rents from US real property, compensation for personal services performed in the US, pensions and annuities from US sources, and original issue discount (OID) on US debt instruments.
What is the default withholding rate?
The default withholding rate on US source income paid to foreign persons is 30%. This can be reduced or eliminated by a tax treaty. The withholding agent must apply the treaty rate if the recipient provides a valid Form W-8BEN claiming treaty benefits.
Do I need to file a US tax return if I receive Form 1042-S?
It depends. If the withholding at source fully covers your US tax liability, you may not need to file. However, if you are entitled to a refund (e.g., tax treaty reduced the rate below the amount withheld), you must file Form 1040-NR to claim the refund. You must also file if you have other US source income not subject to withholding.
What if the withholding agent did not withhold correctly?
If the withholding agent fails to withhold or under-withholds, the withholding agent (not the recipient) is generally liable for the shortfall plus interest and penalties. However, the recipient may still be liable for the underlying tax if the withholding agent cannot pay. If you believe withholding was incorrect, contact the withholding agent first. If unresolved, file Form 1040-NR to report the correct liability.