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Form 1042-S Income Codes Made Easy

Form 1042-S reports U.S. source income and amounts withheld paid to foreign persons such as nonresident aliens, foreign corporations, foreign partnerships, estates, and trusts. It reports the taxes withheld on foreign entities wages, scholarships and fellowships.

Box 1 of form 1042-S requires payer to fill out the two-digit income code. This code indicates the type of income (wages, scholarships, or deposits) paid to the foreign person. Before filing the form 1042-S, you must validate the income code and correctly fill Box 1.

What does each income code mean and how they are used to report different types of U.S. source income for foreign persons?

In this blog, we have shared the cheat sheet of income codes in Form 1042S. We will also talk about the coding checklist and how to fill box 1.

Why the Right Income Code Is Important?

It is important for the payers to fill out the right code in Box 1 since IRS evaluates whether code in this box aligns with the amount shown in withholding area (boxes 7a-11).

IRS has set different statutory rates for withholding taxes from the payee’s income. Thus, different income codes have different withholding rates.

For instance, some payment types have a statutory withholding rate of 30% while others may have a variable rate of 2%, 21%, or 37%. Some payment types have a 0% statutory rate, which means they are exempt from taxes.

Thus, the right income code prevents the over- or under-withholding of the taxes from the amount.

Are There Any Consequences of Incorrect Filing?

Yes. Incorrect filing of form 1042S can lead to return rejection and even financial penalties. Each incorrect or late filing can trigger penalties up to $340 per form. If the IRS considers the mistake as intentional disregard, the penalty doubles to $680 per form or 10% of the income shown, whichever is higher.

The more the number of forms with incorrect filing, the higher the penalty for subsequent forms.

How Form 1042-S Income Codes Are Grouped?

Box 1 of Form 1042-S has various income code options, each of which can be confusing for the taxpayers. IRS has divided these income codes into logical categories, which makes it easier for the payers to figure out the right income code.

Here is a tabular representation of these codes, divided into categories:

Group What It Covers Common Codes Simple Example
Interest Money earned from lending or deposits 01, 29, 30 Bank CD interest to a Canadian resident
Dividends Profit from shares 06, 34, 53 Quarterly dividend on U.S. stock
Services Fees paid for work (17—independent personal services; 18—dependent personal services; 19—teaching; 20—compensation during studying/training; wages are on Form W-2 except limited treaty cases) 17–20 Design contract with a UK freelancer
Royalties & Rent Pay for the right to use property or ideas 10–16 Software license fee to an Indian firm

What are the important Form 1042-S income codes?

Although there are various income codes in Form 1042-S, some are used more than others.

Code(s) What it covers Rules for filing
29 Interests earned on bank deposits. Exempt with a valid W-8. Reporting is a must.
01 Interest earned on non-deposits. Default 30% statutory rate until a treaty code or exemption applies.
17-20 Payment for services (independent, dependent, teaching, training) Withhold taxes only if services are performed in the U.S.
27/57 Publicly traded partnership distributions and sale For code 27: Section 1446(a) highest rates by recipient type. Code 57: 10% of amount realized unless exception.
23 Other income Use only when nothing applies. Document “why 23”

Form 1042-S Income Codes Lookup Table

Wondering which income code to fill in Box 1? Below, we’ve shared each income code in numerical order, each divided into categories.

Refer to these tables for correcting the right income code in Box 1.

Code Category Description
01 Interest Interest paid by U.S. borrowers
02 Interest Interest on U.S. real‑property mortgages
03 Interest Interest paid to controlling foreign corporations
04 Interest Interest paid by foreign corporations on U.S.-source debt
05 Interest Interest on tax‑free covenant bonds
06 Dividends U.S. corporation dividends—general
07 Dividends Dividends qualifying for direct dividend rate
08 Dividends Dividends paid by foreign corporations
09 Capital Gains Reportable capital‑gain income
10 Royalties Industrial royalties (patents, mining)
11 Royalties Motion‑picture/TV royalties
12 Royalties Other royalties (software, copyright)
13 Royalties Royalties on certain publicly offered securities
14 Rents/Royalties Real‑property & natural‑resource royalties
15 Pensions Pensions, annuities, alimony, insurance premiums
16 Scholarship Scholarship or fellowship grants
17 Services Independent personal services (consulting)
18 Services Dependent personal services (wages)
19 Services Teaching compensation
20 Services Compensation during study or training
22 Interest Deposit interest paid by foreign branch of U.S. entity
23 Other Other income (last resort)
24 Other QIE capital‑gain distributions
25 Other Trust distributions under IRC 1445
26 Other Crop/timber distributions under IRC 1445
27 PTP Publicly traded partnership (PTP) distributions (IRC 1446(a))
28 Gambling Gambling winnings
29 Interest Bank‑deposit interest
30 Interest Original issue discount (OID)
31 Interest Short‑term OID
32 Other Notional principal contract income
33 Interest Substitute interest payment
34 Dividends Substitute dividend payment
35 Other Substitute payment—other
36 Dividends Capital‑gain distributions
37 Other Return of capital
38 Other Deferred compensation (IRC 877A)
39 Other Non grantor‑trust distributions (IRC 877A)
40 Dividends Other dividend equivalents (IRC 871(m))
41 Other Guarantee of indebtedness
42 Artist/Athlete Artist/athlete earnings—no CWA
43 Artist/Athlete Artist/athlete earnings—with CWA
44 Other Specified federal procurement payments
50 Other Income previously reported under escrow procedure
51 Interest Interest on actively traded securities
52 Dividends Dividends on actively traded securities
53 Dividends Substitute dividends on actively traded securities
54 Interest Substitute interest on actively traded securities
55 Other Taxable death benefits on life‑insurance contracts
56 Dividends Dividend equivalents—combined transactions
57 PTP Amount realized (IRC 1446(f))
58 PTP PTP distributions—undetermined
59 Other (NEW) Consent fees (optional 2025)
60 Other (NEW) Loan‑syndication fees (optional 2025)
61 Other (NEW) Settlement payments (optional 2025)

How to Choose 1042-S Code?

Now that you have a lookup table for income codes, refer to this step-by-step checklist to identify the right income code.

  • Name the payment: First, look at the invoice or contract of the foreign person. Is the payment made as interest, dividend, rent, royalty, or something else?
  • Find the matching code: After identifying the payment type, use this to find the right income code. Refer to the above table or IRS Appendix A to match the code. Pick the right code and fill in Box 1. Use boxes 59-61 to refer to other payment types.
  • Save proof for at least 3 years: Store certain proof such as payee’s W-8 form, rate calculations and any treaty claim for a period of at least 3 years. Make sure to store a short memo citing why this code fits for this payment.

What are the Common Mistakes While Filing 1042-S and How to File Them?

A payer should carefully file Form 1042-S as incorrect filing can lead to penalties. Yet, there are some common mistakes that you should always be aware of:

  • Mixing 01 and 29: You might mix codes 01 and 29 and consider them the same. However, the two are different. While code 29 refers to the interest paid by U.S. banks on deposits, code 01 indicates the interest paid by other U.S. based obligators. Hence, it is essential to cross-check the interest earned.
  • Overusing code “23”: Payers may overuse the code 23 in Box 1. Overuse of this code to refer each form may result in serious scrutiny from IRS. If you want to refer to other types of payments, refer to the table to indicate the right type of code.
  • Missing U.S. business link (ECI): Some payers might incorrectly withhold 30% tax even if they have partnerships with U.S. businesses. If income is effectively connected to a U.S. trade or business (ECI), it is subject to normal U.S. tax rules rather than the standard 30% Chapter-3 withholding. When reporting ECI on Form 1042-S, you generally use the appropriate exemption code (for example, code 01) and must include the recipient’s U.S. TIN. A foreign person with ECI will typically be required to file a U.S. tax return.

FAQs

1. How many income codes are there in 2025?

There are a total of 61 income codes in Form 1042-S including three new codes (59-61) in 2025.

2. Can the payer list two codes on one form?

Ans: No. Payers can list one code in each form. There should be a new form for each payment type.

3. Is Code 23 safe?

Code 23 is only safe when no other code fits. You should also document why you have used code 23.

4. Does bank-deposit interest need tax?

No, bank deposit interests require no tax withholding under chapter 3. However, you should properly document and keep W-8 as proof and report when required.

5. What happens if the payer uses the wrong code?

If the payer uses the wrong code, they may be liable for penalties. Each incorrect filing can levy a penalty of up to $340 per form.

6. Are the new codes 59-61 required now?

There are still no mandates on code 59-61. It is optional to use them instead of code 23.

7. What is the deadline for filing Form 1042-S?

The last date for filing Form 1042-S is March 15 of the year following the calendar year. If March 15 falls on a weekend or legal holiday, the due date is the next business day.

Choose Tax1099 for correct filing

Now, you must be aware of the importance of correct filing of Form 1042-S. Hence, you should not merely rely on guesswork and IRS letters.

Instead, use a platform like Tax1099 for filing Form 1042-S correctly. Sign up for Tax1099 now and the platform will show you the right code to fill in Box 1.

Tax1099 validates each information and checks each form before submitting. The best part? You can e-file your return in minutes.