Employers, universities, and other U.S. withholding agents must use Form 1042-S to report U.S.-source income paid to nonresident aliens. This includes foreign workers, students, researchers, and other individuals who are not U.S. citizens or residents. Because the IRS requires accurate reporting of these payments, filing Form 1042-S correctly is essential.
What Income Does Form 1042-S Report?
Form 1042-S covers many types of payments. For example, it includes:
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Corporate distributions and dividends
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Interest payments
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Royalties
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Compensation for dependent and independent services
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Pensions and other deferred income
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Gambling winnings
In addition, some income is exempt from withholding but still requires reporting. For instance, scholarships used for tuition, books, and required fees are not taxed, yet they must appear on Form 1042-S.
How Form 1042-S Differs From Form W-2
For nonresident alien employees, Form 1042-S works in a way similar to Form W-2 for U.S. citizens and residents. However, the difference lies in who receives each form:
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Withholding agents issue 1042-S forms to nonresident aliens.
Therefore, both forms provide income and withholding details, but only Form 1042-S applies to foreign individuals.
IRS Rules for Nonresident Aliens
The IRS provides clear guidelines to classify resident and nonresident aliens:
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Resident vs. Nonresident Alien: An individual qualifies as a resident if they meet either the green card test or the substantial presence test. Otherwise, they remain a nonresident alien.
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Tax Treaties: A tax treaty between the U.S. and a foreign country may reduce or eliminate withholding. For example, a research grant may be exempt if covered by treaty provisions.
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Exceptions: Payments to residents of U.S. possessions or territories usually do not require Form 1042-S reporting.
As a result, employers must evaluate each situation carefully to determine whether Form 1042-S applies.
Who Commonly Receives Form 1042-S?
The most common recipients include:
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Foreign students and postdoctoral fellows at U.S. universities
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Visiting scholars or researchers receiving payments from U.S. institutions
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Foreign employees performing services inside the U.S.
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Nonresident aliens who earn U.S.-source investment income
Key Takeaways
✔ Withholding agents must issue Form 1042-S whenever U.S.-source income goes to a nonresident alien.
✔ Income may include wages, scholarships, interest, royalties, pensions, and gambling winnings.
✔ Even if tax treaties exempt the income from withholding, the payment still requires reporting.
✔ Employers and payers should consult IRS Publication 515 and Publication 901 for detailed rules.
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