Final Version of Form 1042 (Rev. 2016)
The IRS has issued the final version of the 2016 Form 1042 and corresponding instructions. The form remains unchanged from the draft version that was released in August 2016 and the instructions include several changes which are summarized below.
Overview: Form 1042
Form 1042 is the annual withholding tax return for U.S. source income of foreign persons. A Form 1042 should be used to report the following:
Final Version of Instructions for Form 1042 (2016)
Lines 2a through 2g
The final instructions now contain detailed descriptions for U.S. source FDAP income not required to be withheld upon on lines 2a-2f. Line 2g is the sum of line 2a-2f.
The key changes on the 2016 version of the Instructions for Form
1042 are below.
Purpose of the Form
The IRS now requires the use of Form 1042 to report the following:
Income Tax Withholding on Wages, Pensions, Annuities and Certain Other Deferred Income
Payments of pensions, annuities and certain other deferred income paid to a foreign person are subject to withholding under section 1441 (as opposed to 3405), and should be reported on Forms 1042 and 1042-S instead of Form 945.
A new section detailing how to report deposits made during a subsequent year has been added to the instructions. If you are making a deposit of tax withheld in the year following the calendar year in which the related payment was made (to the extent permitted under an applicable regulation section in chapter 3 or 4), you must designate the deposit at the time that it is made as attributable to the calendar year in which the payment was made. In such a case, you should report the tax paid on line 65b.
Lines 1 through 60
This section was updated to allow negative amounts to be included on these lines when you are repaying a beneficial owner in the subsequent year pursuant to the reimbursement or set-off procedure and are reporting the reduced liability on line 59.
Foreign partners of U.S. partnerships and foreign beneficiaries of U.S. trusts
This section was previously titled “Foreign partners of U.S. partnerships.” Under this revised heading, instructions as to how a domestic trust should report on lines 1 through 60 were added.
Withholding after the time of payment
This section was added to the instructions to provide detail on how to report withholding that takes place after the time that a payment has been made.
Total Tax Reported as Withheld or Paid
The instructions under this heading have been amended with respect to line 63c. See “Updates to the 2016 Version of the Form 1042,” above for more information as to the new requirements.
Total Net Tax Liability
Line 64a should now include any adjustment to total net tax liability, as opposed to certain tax liabilities that result from adjustments of underwithheld tax on corporate distributions made in the current calendar year, which were required to be reported on the prior version.
Reporting of Taxes Paid and Overpayment or Balance Due
New instructions are provided with respect to line 65 because the draft 2016 Form 1042 splits line 65 into lines 65a and 65b. Deposits of tax withheld during the calendar year in which the related payment was made should be entered on line 65a. Deposits of tax withheld during the year following the calendar year in which the related payment was made should be entered on line 65b.
Adjustment for Overwithholding
The instructions under the set-off procedure sub-category have been amended. The requirement that the amounts reported on lines 63a and 63b should reflect a reduction of any amount withheld from income paid to a beneficial owner because you applied the set-off procedure during the calendar year or the subsequent calendar year, has been removed. The draft instructions now state that amounts reported on line 63c(1) should be limited to amounts repaid to the beneficial owner or payee (by reducing the withholding on a later payment) in the subsequent calendar year (before the earlier of the filing of the associated Form 1042-S or the due date for such form).
Adjustment for Underwithholding
This is a new section of the instructions, which provides details on how to report the liability related to withholding on lines 1 through 60 for the period in which you adjusted underwithholding by withholding additional tax.
The new instruction for adjustments for underwithholding comports with Treasury and the IRS’s interpretation (stated in Notice 2016-76) that a withholding agent should not be subjected to late deposit penalties when it corrects an amount underwithheld by March 15th of the year following the calendar year in which the underwithholding occurred.
For Your Reference
The Form 1042 (Rev. 2016) can be accessed using the following link: Form 1042 (Rev. 2016) (PDF | 130KB)
The Instructions for Form 1042 (2016) can be accessed using the following link: Instructions for Form 1042 (PDF | 221KB)
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