Form 1042‑S Threshold: A Simple Guide for U.S. Payers

Running a successful business also means filing tax forms, sticking to IRS deadlines, and avoiding penalties. This can seem like a complex maze for most businesses. If you’re growing across borders and dealing with foreign person, it adds another twist to the filing process. Use this guide to understand when to file 1042-S, what form 1042-S threshold is, 1042-S deadlines and 1042-S penalties if you have a slipup.

Overview:

• There is no minimum dollar threshold to issue a Form 1042-S.
• Acc. to IRS, if you file 10 or more than 10 information returns in total in a tax year, you will have to e-file them.
• You don’t have to issue a corrected 1042-S form if a reported amount is incorrect by $100 or less and withheld amount is incorrect by $25 or less.

Let’s first understand what Form 1042-S is. Form 1042-S, titled ‘Foreign Person’s U.S. Source Income Subject to Withholding,’ is used to report U.S.-source income paid to foreign persons. This includes non-resident alien tax reporting and foreign corporations.

What is Form 1042-S Threshold?

The IRS has stringent regulations when it comes to tax reporting, especially for form 1042-S. Form 1042-S has no minimum payment threshold. This means that it has filed even for $1 paid to a foreign person. Note that the money has to be from a U.S. source.

This is not the case with forms 1099-NEC or 1099-MISC. These forms have a $600 threshold, which means that the forms don’t have to be filed until the total paid to a U.S. recipient reaches $600 in a calendar year.

It’s safe to say that the IRS gives less breathing room for 1042-S. So, even if you paid $5 royalty to a foreign author, file 1042-S. The IRS cross-checks Form 1042-S against the annual tax return (Form 1042). Missing forms attract costly penalties and avoidable compliance issues.

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What Payments Need Form 1042-S?

Understanding what types of payments are covered in Form 1042-S, no matter how small the payment or whether tax was withheld, is crucial for payers. Here are some main categories of payments:

• Dividends and interest from U.S. companies
• Royalties on books, software, or music used in the U.S
• Scholarships and grants covering living expenses
• Service fees for work done on U.S soil, even one‑day events
• Crypto or property payments (convert to U.S. dollars)

Note: Even if there is 30% default tax withholding or reduced treaty rates, the payment still has to be documented on 1042-S.

Who is a 1042-S payer?

So, who is the “payer”? A payer for 1042-S form is any U.S. entity or person who makes a payment from U.S. sources to a non-U.S. person. It can be a university giving out scholarships to international students, a U.S. company paying foreign vendors, or a marketplace platform sending royalties abroad.

The payer is required to withhold an appropriate amount based on the tax treaties and file 1042-S. The general withholding tax rate is 30% if there is no tax treaty between the U.S and the payee’s country of residence.

Note: If a U.S. agent or escrow company delivers the funds, that agent becomes the payer for IRS purposes.

Your 3-Step Compliance Checklist to File 1042-S

Step 1: Collect W-8

This will help you determine if the payee is foreign. It includes the recipient’s foreign status and any treaty benefits. Without this, you might risk backup withholding of 1042-S.

Step 2: Withhold or reduce tax

Apply the default withholding rate of 30%. This is unless there is a tax treaty between the countries that reduces or exempts it.

Step 3: File and reconcile

File one Form 1042-S per payee and income type. Make sure that the totals match the annual Form 1042.

Tax1099 auto-checks TINs and treaty codes, cutting your prep time by 50%

E-Filing Rules and Thresholds

Paper filing is not the norm anymore. If you have more than 10 total information returns for the year, e‑file 1042‑S. This is much faster and makes compliance easier than paper filing.

Key deadlines: Send the forms to the IRS and the payee by March 15.

If you need extra time to file 1042-S, file Form 8809, Application for Extension of Time To File Information Returns, with the IRS. This should be done before the original 1042‑S deadline. You will get an automatic 30-day extension. Note that this only applies to filing with the IRS, not the recipient copy.

Cost of Errors and How to Fix Them

Did you know that a minute mistake can cause substantial penalties? It can range from $60 to $330 per late or incorrect form.

If the IRS finds out that you didn’t file the forms on purpose, also called intentional disregard, the 1042-S penalties can have no maximum cap.

But to err is human! If you make mistakes, file a corrected form immediately, ideally within 30 days. This shows that you made an effort to rectify your mistakes, and the IRS might provide some leeway in terms of penalties.

Difference Between Copy A and Copy B

Do you know what Copy A and Copy B are? What are they used for? It’s important to get them right to stay complaint.

Copy A is the red-ink “IRS copy”. If you, as a payer, e-file 1042-S with Tax1099, this becomes the electronic submission that reaches the IRS.

Copy B is the payee copy. Give this to each foreign recipient so they can claim any refund or maintain proof of withholding for tax compliance purposes.

Tips:

• Copy A is handled automatically in e‑filing. The red paper version is not needed.
• Email or mail Copy B securely by March 17, 2025.
• Keep backup copies of both the forms for at least four years.
• Real-Life Scenarios

 

When to File 1042-S

Below are some examples which show when to file 1042-S and what information to report.

Situation	What the Payer Does	Why It’s Required
1. $25 royalty to a foreign author	Convert the $25 to USD (already done) File Form 1042‑S Show $0 tax because a tax treaty gives a 0 % rate	First‑Dollar Rule: Even $1 must be reported. The treaty explains why no tax was withheld, and the IRS needs that proof.
2. $7 speaker fee on campus (30 % tax withheld)	Withhold $2.10 (30 % of $7) at payment-time File Form 1042‑S showing gross $7 and tax of $2.10	Any Amount With Tax: Once tax is withheld, even pennies, the payment must be reported so that the foreign speaker can claim credit.
3. $1,200 scholarship for living expenses	Determine taxable portion (living costs are taxable) Withhold 14 % or 30 % depending on student’s visa/tax treaty File Form 1042‑S reflecting the tax	Living Expense Rule: Tuition scholarships can be tax‑free, but stipends for rent or food are taxable, so the form shows the IRS what was withheld.
4. 50 interest on a U.S. Bond (treaty 0 %)$	File Form 1042‑S Show $0 tax (treaty) Enter income code for interest	Treaty Documentation: Even when the bond interest is exempt, the IRS wants the form to confirm the treaty claim.
5. 0.5 BTC payment ($18,000) to a foreign coder	Convert crypto’s fair‑market value to USD on payment date Withhold 30 % ($5,400) unless treaty reduces it File Form 1042‑S with income code “16 – Independent Personal Services”	Crypto Counts as Property: The IRS treats virtual currency like cash for withholding. The form locks in the USD value and shows any tax collected.

Bottomline

It doesn’t matter if you’re paying $7 for a speaker fee or $18,000 to a vendor abroad, Form 1042-S tracks income, tax withheld, and treaty benefits. If you skip filing, you’re inviting IRS penalties, even when no tax is due. Also, make sure to collect W-8s, showing proof of foreign status, upfront. If you don’t, you might risk backup withholding.

 

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FAQs

1. Is there a minimum threshold for filing?

No, the first dollar should be reported in 1042-S.

2. Should I report even treaty-exempt income?

Yes, the form serves as a documentation as to why tax wasn’t withheld.

3. Are U.S. bank deposit interest payments reportable on 1042-S?

No, as they are usually treated as foreign-source income.

4. Is e-filing mandatory?

If the payer issues 10 or more information returns, it is mandatory to file electronically.

5. How can over-withheld tax be corrected?

This is easy! All you have to do is file a corrected form 1042-S showing the refund amount.

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