Form 1042-S vs 1099: Key Differences for Foreign vs U.S. Income Reporting

What is the Difference Between 1042-S and 1099?

Handling taxes in the U.S can be tricky and tedious for businesses even in the most basic scenarios. What if you’re conducting business outside the U.S? Or providing financial assistance like grants or stipends to international scholars? Can you issue the same forms? No. You might need to decide between form 1042-S vs 1099.

To start with, the basic difference you need to understand is that Form 1099 is an essential tax form used to report payments made to U.S. people and businesses. Form 1042-S is used to report income paid to foreign persons (non-US people) or companies.

Both these forms have specific requirements and deadlines you need to comply with. Using the wrong forms can lead to significant penalties, lots of paperwork, IRS scrutiny, and unhappy payees. That’s why understanding the difference between 1042-S and 1099 is important. Let’s break it down for you.

Quick recap: Remember this rule of thumb. Form 1099 is used for U.S. citizens, green card holders, or U.S. businesses. Form 1042-S is for reporting foreign income to the IRS.

What Is Form 1099?

Businesses use Form 1099 to report various types of payments made to US persons who are non-employees. Various 1099 forms are designed to document payments made in different scenarios between individuals or businesses. The most common forms are 1099-NEC for nonemployee compensation and Form 1099-MISC for miscellaneous income

For example, use Form 1099 for U.S. payees who received:

• Independent Contractors (1099-NEC)
• Rents, prizes, or awards (1099-MISC)
• Interest, dividends, etc. (1099-INT)

How do you go about filing 1099? Collect Form W-9 from your payee. This gives you their Social Security Number (SSN) or Employer Identification Number (EIN), confirming their U.S. status. Send the 1099 to both the IRS and your payee. Generally, no tax is withheld from 1099 payments unless backup withholding applies.

Filing deadlines for 1099 forms:

• January 31: Deadline to provide copies to payees
• February 28: Paper filing deadline with IRS
• March 31: Electronic filing deadline with IRS

What Is Form 1042-S?

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. It is filed by withholding agents, such as financial institutions, corporations, universities etc.

The IRS uses this form to monitor U.S.-earned income by foreign persons and to ensure that everyone pays the right amount of taxes.

Here’s when to use form 1042-S:

• Foreign contractors working in the U.S
• International students or researchers getting scholarships or grants.
• Foreign vendors or companies receiving U.S.-source payments

If you’re not sure if someone is “foreign,” ask where they live, work, and conduct business. If you’re doubtful, collect the appropriate W-8 form (like W-8BEN or W-8BEN-E). This proves their tax status.

Unlike 1099 forms, 1042-S payments usually require tax withholding at the time of payment. The 1042-S withholding rate is generally 30%. But this can be reduced or waived through tax treaties.

Filing deadline for Form 1042-S: You must file Form 1042-S with the IRS and send copies to recipients by March 15 each year. Extensions are available using Form 8809. This gives you an additional 30 days.

E-File 1042-S and 1099 Forms Easily with Tax1099.
Pick the right form the first time and keep your business penalty-free with our e-filing solution!

Get Started Now

1042-S vs 1099: A Quick Comparison

Factor	Form 1042-S	Form 1099
Who gets it?	Non-U.S. persons/businesses	U.S. persons/businesses
What do you need?	W-8BEN (or similar)	W-9
Tax withheld	Yes (usually 30%)*	Not usually (unless TIN is missing)
Typical payments	U.S. work, scholarships	Contractor, rent, prizes
Deadlines	March 15 (IRS and payee)	January 31 (payee), February/March (IRS)
IRS Penalties	For wrong form, late filing, or no tax withheld	For wrong form, late filing

*Can be less if a tax treaty applies.

How Do I Decide Which Form to Use?

Take note of the following approach to decide when to file 1099 vs 1042-S
and ensure compliance.

Step 1: Ask for the right documentation upfront.

• If they provide W-9 (U.S. person) – use 1099
• If they provide W-8 (Foreign person) – use 1042-S

Step 2: Look at the payment location and source

• Paying for work done in the U.S. by a non-resident? Use 1042-S.
• Paying for work done outside the U.S. by a foreign person? No 1042-S or 1099 needed

Step 3: If you’re unsure about the payee’s tax status, always consult with tax professionals or your e-file provider.
Step 4: Keep all W-9 and W-8 forms, as well as supporting documents, for at least four years after filing.

Common Mistakes and How to Avoid Them

We have listed the common filing errors. Remember them to avoid costly compliance issues.

Mistake 1: Using Form 1099 for foreign payees

Always verify documents before you file. Check if the payee has issued W-8 or W-9.

Mistake 2: Inadequate tax withholding on 1042-S payments

Use the latest IRS withholding tables and check for applicable tax treaties.

Mistake 3: Missing or incorrect recipient information

This can be incorrect taxpayer identification numbers, missing country codes, etc. Double-check all details before you file.

Mistake 4: No remembering to send recipient copy

It’s mandatory to send copies to the recipient as well as the IRS. If you don’t, it can result in penalties.

Mistake 5: Filing the wrong form for work done outside the U.S.

Services outside the U.S. by foreign persons generally don’t require reporting. Always check before you file.

Real-Life Scenarios

1. U.S. business pays a U.S. freelancer for website work

Collect W-9 to confirm U.S. status and issue 1099-NEC if you paid more than $600 annually. No tax is withheld unless backup withholding applies.

2. U.S. college pays scholarship to an international student

Collect W-8BEN to establish foreign student status. Then, issue 1042-S. You might need to withhold 14% or 30% of the amount depending on the tax treaty with the student’s country.

3. U.S. company pays a foreign graphic designer working in the U.S.

Collect W-8BEN and issue 1042-S. You need to withhold 30% unless treaty rate applies.

4. U.S. company pays a foreign consultant working from their home country

Since the work was not done in the U.S, neither form is required.

5. Payee provides a W-9, but the passport says France nationality

Always ask for clarification regarding tax residency status. If you determine that they are a foreign resident, request W-8BEN and file 1042-S.

6. Forgot to file a 1042-S for a foreign payee

File 1042-S as soon as possible. Late filing has lower penalties than not filing at all!

FAQs

1. Can I receive both the forms in the same year?

This is unlikely, but it’s possible. This happens if your tax status changes during the year. Maintain accurate records and make sure each payment is reported only once in the right form.

2. What is the easiest way to determine if someone is “foreign” or “U.S.” for tax filing?

First, don’t guess based on face value. Always ask for a W-9 for U.S. persons or W-8 for foreign persons. Let the payee confirms the tax status through proper documentation.

3. What if I’m not sure which form to use?

Again, don’t guess. Ask your tax professionals or e-file provider to avoid penalties.

4. Do I have to withhold 30% for every 1042-S?

Usually yes, but not always. Some countries have tax treaties which can reduce this significantly. If you’re unsure, check the IRS website or ask your e-file provider.

5. What happens if I file late or use the wrong form?

The IRS penalties can range from $60 to $330 per form, depending on how late you file. Using wrong forms can lead to additional penalties. File corrections immediately after you find errors.

6. I paid a foreign person less than $600. Do I need to file 1042-S?

Yes. There is no minimum threshold for 1042-S. Unlike 1099, which generally requires $600 in payments, 1042-S must be filed for any amount of reportable U.S.-source income paid to foreign persons.

Simplify your 1099s and 1042-S filing process with Tax1099’s advance features!

Get Started Now