Who must file Form 1042?

Withholding agents must file Form 1042 if they made payments of U.S. source FDAP income to foreign persons (nonresident aliens, foreign corporations, foreign partnerships, foreign trusts). Withholding agents include: U.S. businesses paying dividends, interest, rents, or royalties to foreign persons; partnerships with foreign partners; and financial institutions.

What is the standard withholding rate for FDAP income?

The standard withholding rate for FDAP income paid to foreign persons is 30%. This rate can be reduced or eliminated by: (1) a tax treaty between the U.S. and the payee's country of residence; (2) the portfolio interest exemption (for certain U.S. bond interest); (3) the qualified dividend exemption for certain foreign corporations. [IRC §1441]

What is FATCA and how does it affect Form 1042 filers?

FATCA (Foreign Account Tax Compliance Act) requires foreign financial institutions (FFIs) to report U.S. account holders to the IRS. U.S. withholding agents must withhold 30% on 'withholdable payments' to non-participating FFIs. FATCA withholding is reported on Form 1042. FFIs that comply with FATCA (by registering with the IRS) are exempt from FATCA withholding.

What is the liability of a withholding agent?

A withholding agent is personally liable for the tax that should have been withheld, even if the foreign person ultimately pays the tax. If the withholding agent fails to withhold, they are liable for the tax plus interest and penalties. The withholding agent can seek reimbursement from the foreign person, but this does not eliminate the agent's liability to the IRS.

Form 1042-S (Foreign Person's U.S. Source Income Subject to Withholding) is the information return that accompanies Form 1042. A separate Form 1042-S is issued to each foreign person for each type of income. Form 1042-S must be furnished to recipients by March 15 and filed with the IRS by March 15 (or March 31 for electronic filers).

IRS Form — Annual Withholding Tax Return for U.S. Source Income

Form 1042 — Annual Withholding Tax Return for U.S. Source Income of Foreign Persons

Form 1042 is filed by withholding agents who pay U.S.-source income to foreign persons — including dividends, interest, rents, royalties, and other FDAP income. The withholding agent is responsible for withholding 30% (or reduced treaty rate) and remitting it to the IRS. For tax professionals, Form 1042 is relevant for clients who make payments to foreign contractors, foreign investors, or foreign employees.

✓ Verified 2026 Form 1042 Rules

✓ FDAP Withholding Rules Confirmed

✓ Treaty Reduction Rules Confirmed

✓ Form 1042-S Deadline Confirmed

30%

Default FDAP Withholding Rate for Foreign Persons

Form 1042-S

Recipient Statement — Issued to Each Foreign Payee

March 15

Form 1042 Filing Deadline

IRC §1441

Withholding on Foreign Persons Authority

Key Rules and Authority

Rule	Detail
Default Withholding Rate	30% on FDAP income
Treaty Reduction	Varies by country and income type
Form 1042 Deadline	March 15
Form 1042-S Deadline	March 15 (to IRS and recipient)
Withholding Agent Liability	Liable for tax not withheld
W-8BEN	Foreign person certifies status and treaty claim

Who Is a Withholding Agent?

A withholding agent is any U.S. person (individual, corporation, partnership, trust, or estate) that has control over the payment of U.S.-source income to a foreign person. Common examples include: a U.S. company that pays dividends to a foreign shareholder; a U.S. business that pays royalties to a foreign licensor; a U.S. partnership that distributes income to a foreign partner; and a U.S. individual who pays rent to a foreign landlord. The withholding agent is responsible for withholding 30% (or the applicable treaty rate) on FDAP income and remitting it to the IRS using EFTPS. Failure to withhold makes the withholding agent personally liable for the tax.

Frequently Asked Questions

My client pays a foreign contractor for services performed outside the U.S. Do they need to withhold?

No — payments for services performed entirely outside the United States are not U.S.-source income and are not subject to withholding under §1441. The foreign contractor does not need to file a U.S. tax return for this income. However, if the services are performed partly inside and partly outside the U.S., the portion attributable to U.S. services is U.S.-source income subject to withholding. The foreign contractor should provide Form W-8BEN (individual) or W-8BEN-E (entity) to certify their foreign status. The U.S. payer should retain the W-8BEN as documentation that withholding was not required.

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Form 1042 — Annual Withholding Tax Return for U.S. Source Income of Foreign Persons

Key Rules and Authority

Who Is a Withholding Agent?

Frequently Asked Questions

Master International Withholding Compliance for Your Clients

Related Resources

Free Access for Tax Professionals

Form 1042 — Annual Withholding Tax Return for U.S. Source Income of Foreign Persons

Key Rules and Authority

Who Is a Withholding Agent?

Frequently Asked Questions

Master International Withholding Compliance for Your Clients

Related Resources