Foreign workers, students, and other non-resident aliens are subject to U.S. tax withholding when they work in the United States. Payments made by withholding agents—such as businesses, employers, or financial institutions—must be reported on Form 1042-S and submitted to the IRS. Unlike U.S. citizens, non-resident aliens are taxed only on U.S.-sourced income, but all payments must still be reported.
Even if a U.S. withholding agent pays a non-resident for services performed abroad, those payments must be reported on Form 1042-S. This means businesses and institutions making payments to foreign workers are required to document and report the payments, regardless of whether they are taxable.
FATCA’s Impact on 1042-S Reporting
The Foreign Account Tax Compliance Act (FATCA) introduced new requirements that expand Form 1042-S reporting. FATCA was designed to identify U.S. taxpayers holding assets in foreign accounts and requires foreign financial institutions (FFIs) to report names and account holdings. Without compliance, U.S.-sourced payments can face a 30% withholding tax.
The rules have also been extended to include non-financial foreign entities (NFFEs)—foreign entities that hold assets in U.S. institutions or receive U.S.-sourced payments. By requiring these entities to report, FATCA helps uncover U.S. taxpayers whose identities and foreign accounts might otherwise remain hidden.
Withholding Agent Responsibilities Under FATCA
Under FATCA, the definition of withholding agent is broad. It includes any U.S. or foreign person or business that makes a payment to a foreign entity or individual. U.S. businesses, banks, and other financial institutions must track and report these payments, even if they are made to non-financial foreign entities.
The IRS uses this information to trace U.S.-sourced payments worldwide. This means both U.S. citizens and non-residents who receive payments from a U.S. source may be reported under FATCA rules. Form 1042-S was updated to reflect these FATCA requirements starting with the 2015 reporting year.
Compliance and Penalties
Failure to comply with FATCA reporting requirements can result in significant penalties. While there was a two-year transition period allowing “good faith efforts” to avoid penalties, withholding agents are now expected to fully comply.
Businesses making payments to foreign individuals or entities should keep thorough documentation and use proper reporting software to stay compliant with both Form 1042-S and FATCA mandates.