IRS Instruction 1042 – IRS Forms, Instructions, Pubs 2026 – Navigating U.S. tax withholding for foreign persons can be complex, but understanding IRS Form 1042 is essential for compliance. Whether you’re a withholding agent, financial institution, or business dealing with international payments, this comprehensive guide breaks down the 2025 instructions for Form 1042, the Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. We’ll cover key updates, filing requirements, step-by-step guidance, and more, drawing from official IRS sources to ensure accuracy and reliability.
What’s New in the 2025 IRS Form 1042 Instructions?
The IRS regularly updates its forms and instructions to reflect legislative changes and improve clarity. For tax year 2025 (filed in 2026), here are the notable additions and modifications:
- Claims for Credit or Refund on Borrow Fees: Under Notice 2025-63, certain borrow fees are now sourced based on the recipient’s residence. Qualified intermediaries (QIs) can claim collective refunds by attaching Forms 1042-S and a statement referencing this notice.
- Direct Deposit and Electronic Payments: You can now use direct deposit for refunds if you have access to U.S. banking. Additionally, IRS Direct Pay is available for federal tax deposits and balance due payments.
- Expanded Direct Deposit Lines: Line 71 has been split into 71b, 71c, and 71d to accommodate detailed banking information for refunds.
- End of Credit Forward Framework: After December 31, 2024, withholding agents, including qualified securities lenders (QSLs), can no longer use the credit forward system from Notice 2010-46 for substitute dividends in securities lending or stock repurchase agreements.
These changes aim to streamline reporting and align with FATCA (Foreign Account Tax Compliance Act) requirements.
Purpose of IRS Form 1042
Form 1042 is used to report tax withheld on U.S. source income paid to foreign persons, including nonresident aliens, foreign partnerships, corporations, estates, and trusts. Specifically, it covers:
- Tax withheld under chapter 3 (sections 1441–1443, excluding 1445 and 1446 in most cases) on fixed or determinable annual or periodical (FDAP) income.
- Tax withheld under chapter 4 (FATCA) on withholdable payments.
- Tax on specified federal procurement payments under section 5000C.
- Tax withheld under section 877A on deferred compensation or distributions to covered expatriates.
- Certain distributions subject to section 1445 (e.g., from publicly traded trusts or REITs) and section 1446 (publicly traded partnerships).
It’s also used to reconcile amounts reported on Forms 1042-S and to claim credits or refunds for overwithheld taxes. Remember, even if no tax was withheld, you may still need to file if you’re required to issue Forms 1042-S.
Who Must File Form 1042?
You must file if you’re a withholding agent (U.S. or foreign) that receives, controls, or pays U.S. source income subject to withholding under chapters 3 or 4. This includes:
- Financial institutions, brokers, or intermediaries making payments to foreign persons.
- Publicly traded partnerships (PTPs) or nominees withholding under section 1446.
- Entities handling distributions subject to section 1445 withholding.
- Qualified intermediaries (QIs), withholding partnerships (WPs), or withholding trusts (WTs) claiming collective refunds.
- Anyone required to file Forms 1042-S, even without actual withholding.
Exceptions apply if you’re not liable for withholding or if payments are exempt. Withholding agents are personally liable for taxes, interest, and penalties, so consult Pub. 515 for details.
Key Definitions in the Form 1042 Instructions
Understanding terminology is crucial for accurate filing:
- Withholding Agent: Any person responsible for withholding, including U.S. branches of foreign entities.
- Qualified Intermediary (QI): A foreign intermediary assuming primary withholding responsibilities under an IRS agreement.
- Withholdable Payment: Payments subject to FATCA withholding, such as dividends or interest.
- Foreign Financial Institution (FFI): Includes participating FFIs (PFFIs) and nonparticipating FFIs.
- Recalcitrant Account Holder: An account holder who fails to provide required FATCA documentation.
For full definitions, refer to the IRS glossary in the instructions.
Filing Requirements: When, Where, and How?
Due Date
Form 1042 is due by March 15 of the year following the calendar year in which the income was paid (e.g., March 15, 2026, for 2025 income). If the date falls on a weekend or holiday, file by the next business day.
Electronic vs. Paper Filing
- Electronic Filing: Mandatory for financial institutions, partnerships with over 100 partners, or if filing 10 or more information returns. Use the FIRE system (Filing Information Returns Electronically) as detailed in Pub. 4163.
- Paper Filing: Mail to Internal Revenue Service, P.O. Box 409101, Ogden, UT 84409.
Extensions
Request an extension using Form 7004. This extends the filing deadline but not the payment due date.
Deposit Requirements
Deposits must be made electronically via EFTPS (Electronic Federal Tax Payment System). Frequency depends on the amount:
- Over $2,000 undeposited: Deposit within 3 business days after the quarter-monthly period.
- $200–$1,999: By the 15th of the following month.
- Under $200: With Form 1042 or by March 15.
Failure to deposit electronically incurs a 10% penalty.
Step-by-Step Guide to Filling Out Form 1042
Form 1042 consists of sections for tax liability, reconciliations, and payments. Here’s a breakdown:
Employer Identification Number (EIN) and Address
Enter your EIN (or QI-EIN/WP-EIN/WT-EIN if applicable) and full address, including country code.
Chapter 3 and 4 Status Codes
Select codes from the instructions (e.g., 01 for U.S. withholding agent, 12 for QI).
Section 1: Record of Federal Tax Liability (Lines 1–60)
Report monthly tax liability by period. Do not include deposits or adjustments here. Sum chapter 3 and 4 liabilities on lines 64b and 64c.
For visual reference, here’s a sample of Section 1 from Form 1042:
Total Gross Amounts (Lines 62a–62d)
Reconcile with Forms 1042-S totals, separating FDAP income and substitute payments.
Total Tax Reported (Lines 63a–63e)
Include withheld taxes, adjustments, and repayments.
Net Tax Liability and Payments (Lines 64–71)
Calculate net liability, add deposits, and determine overpayment or balance due. Use lines 71b–71d for direct deposit details.
Round all amounts to whole dollars and attach Schedule Q if you’re a QDD.
Adjustments for Overwithholding and Underwithholding
- Overwithholding Discovered by March 15: Reimburse the payee and adjust deposits.
- Overwithholding Later: Use reimbursement or set-off procedures; report on line 63c(1).
- Underwithholding: Withhold additional amounts from future payments or pay directly; report on line 63c(2).
For escrow procedures on uncertain payments, hold 30% until source is determined.
Penalties and Interest for Non-Compliance
- Late Filing: 5% per month, up to 25%.
- Late Payment: 0.5% per month, up to 25%.
- Interest: Charged on unpaid taxes at the underpayment rate.
- Additional penalties for negligence, fraud, or failure to deposit.
The IRS will calculate and bill these—avoid them by double-checking your form against Pub. 515.
Common FAQs About Form 1042
1. What if I need to amend Form 1042?
File an amended return by checking the box and correcting errors. Amend related Forms 1042-S as needed.
2. How does FATCA affect Form 1042?
Chapter 4 withholding (30% on withholdable payments) must be reported separately from chapter 3.
3. Can foreign withholding agents file electronically?
Yes, but they’re exempt from mandatory e-filing for 2024 (filed in 2025); check updates for future years.
4. Where can I get help?
Call the IRS at 267-941-1000 (international line) or visit IRS.gov for Pub. 515 and other resources.
Conclusion
Filing IRS Form 1042 correctly ensures compliance with U.S. withholding tax rules for foreign income and avoids costly penalties. Stay updated via IRS.gov/Form1042 for any future developments. If you’re handling international payments, consult a tax professional to tailor these instructions to your situation. For the full official document, download the PDF from the IRS website.
This guide is based on the latest 2025 instructions as of February 2026.