As year-end draws to a close and 2025 quickly approaches, please be aware of a change in the electronic filing requirements for Form 1042-S, which is due on March 15, 2025.
In February 2023, the IRS passed new Treasury Regulations for calendar year 2023 and later, that require electronic filing of Form 1042-S if a non-financial payor has at least ten (10) 1042-S. Previously, the electronic filing threshold was 250 forms.
This means that you need to determine the proper e-filing method for your organization (e.g., Modernized E-File through OneSource or the IRS’ Filing Information Returns Electronically (“FIRE”) system) and integrate it with your data.
Additionally, Form 1042 will also need to be filed electronically for 2024 transactions by March 15, 2025. The deadline is fast approaching, and businesses of all sizes may be impacted.
Background: Form 1042
Form 1042, 1042-S, and 1042-T (if applicable) are a set of forms filed by U.S. taxpayers for all U.S. source, fixed or determinable, annual or periodic (“FDAP”) payments made by U.S. taxpayers to non-U.S. recipients and potentially subject to non-resident withholding and reporting. Non-resident withholding is assessed at 30% and can be reduced if the recipient is located within a tax-treaty country with the U.S. Even if no U.S. withholding tax is applicable, certain payments may still have to be reported.
Withholdable payments include, but are not limited to, interest, dividends, compensation for personal services performed within the U.S. (generally excluding expense reimbursement,) royalties, rents, prizes/awards, and scholarships/grants. Payments incurred as cost of goods sold in the ordinary course of business are generally excluded. Statutory exceptions may apply, which require extra technical review.
The payor or U.S. withholding agent is responsible for depositing the proper U.S. withholding tax to the IRS. U.S. withholding tax is applied when payment is made to the non-U.S. party, not when it is accrued.
Form 1042 and its accompanying documents are filed for a calendar year, regardless of the taxpayer’s fiscal year. Form 1042-S needs to be filed by income type and recipient (e.g., a non-U.S. recipient receiving service fee income and royalties will have to file two 1042-S). Form 1042 is a summary sheet that totals the income and withholding tax paid from all Form 1042-S. Form 1042-T is a transmittal sheet that accompanies paper 1042-S forms but is not required for electronic filing.
New Process for Form 1042-S
Eligible businesses should adhere to the following process in order to comply with changes in the electronic filing requirements for Form 1042-S:
- Identify whether the payment is U.S. or foreign source for calendar year 2024. Retain residency documentation from the non-U.S. recipient such as a completed Form W-8.
- Determine whether the payment is withholdable and reportable on Form 1042.
- Determine if any exceptions or tax treaty rate reductions apply.
- Deposit U.S. withholding tax as applicable.
- Compile data and prepare Form 1042, 1042-S, and 1042-T (if paper mailing) by March 15, 2025.
GTM is ready and able to assist with determining the best e-filing method for your needs, help you analyze the data, and assist with preparing and reviewing these forms in 2024. Contact us below.
