Foreign persons receiving U.S. Source FDAP Income: the deadline is coming up quick!
Form 1042, the Annual Withholding Tax Return for U.S. Source FDAP Income of Foreign Persons, is due by March 15th for the 2016 year. Form 1042 reports federal tax which is required to withheld on FDAP (fixed, determinable, annual or periodical) income for a given calendar year, which is not effectively connected to a U.S. trade or business. Form 1042 returns are required for nonresident aliens, foreign partnerships, foreign estates, foreign corporations and foreign trusts with FDAP income subject to withholding. Every withholding agent MUST file Form 1042 / 1042-S / 1042-T returns and have remitted U.S. withholding tax timely, or be liable for the tax withholding amount plus penalties. An extension can be requested by filing Form 7004, but it does not extend the time to pay any withholding tax due. It only extends the time to file withholding tax returns.
What is the difference between Forms 1042 / 1042-S / 1042-T?
U.S. withholding must issue Form 1042-S to each foreign person who received payments of FDAP income and had U.S. federal tax withheld. It is similar to U.S. persons receiving a Form 1099 for payments of FDAP income from domestic sources. Form 1042-S must be provided to foreign persons even if no amount was actually withheld due to exceptions under the Internal Revenue Code or a U.S. tax treaty.
Form 1042-S reports not only the type of FDAP income which foreign persons receive, but also the exceptions asserted to not withhold U.S. tax either under the Code or a treaty. Form 1042 reports the aggregate amounts of FDAP income and U.S. withholding tax for all foreign persons in a given calendar year. On the other hand, Form 1042-S reports the total income and withholding allocated to each foreign person. Finally, Form 1042-T is a transmittal page for all of the 1042-S forms being submitted.
What if I fail to file?
Generally, withholding agents are personally liable for any U.S. tax required to be withheld. The liability is independent of the foreign income recipient’s U.S. tax liability. If a withholding agent fails to withhold and the foreign recipient fails to satisfy its U.S. tax liability and filing obligations, then BOTH the withholding agent and the foreign recipient are liable for the full amount of withholding tax plus interest and penalties.
A withholding agent is any U.S. or foreign person, acting in whatever capacity, who has control, receipt, custody, disposal, or payment of U.S. source FDAP income subject to withholding tax. A person may be a withholding agent even if there is no requirement to withhold OR if another person has withheld the required amount from the payment of income. The withholding tax amount due is collected only once, so if the foreign income recipient satisfies its U.S. tax liability and filing obligations, the withholding agent would not liable for the tax amount due, but would remain liable for interest and penalties for failing to withhold.