{"id":3954,"date":"2025-03-17T14:27:28","date_gmt":"2025-03-17T14:27:28","guid":{"rendered":"https:\/\/www.tax1099.com\/blog\/?p=3954"},"modified":"2025-09-22T06:59:34","modified_gmt":"2025-09-22T06:59:34","slug":"what-are-form-1042-s-exemption-codes","status":"publish","type":"post","link":"https:\/\/www.tax1099.com\/blog\/what-are-form-1042-s-exemption-codes\/","title":{"rendered":"What are Form 1042-S Exemption Codes?"},"content":{"rendered":"

What Are Form 1042-S Exemption Codes?<\/h2>\n

Form 1042-S, Foreign Person\u2019s U.S. Source Income Subject to Withholding, is used to report certain U.S.-sourced income paid to foreign persons and the amount of tax withheld. Two important boxes on this form are Box 3a<\/strong> (Chapter 3 Exemption Code) and Box 4a<\/strong> (Chapter 4 Exemption Code). These boxes indicate whether the recipient qualifies for an exemption from withholding under Chapter 3 (Withholding on Payments to Foreign Persons) or Chapter 4 (FATCA Withholding).<\/p>\n

When completing Form 1042-S<\/a>, withholding agents must enter the correct exemption code if an exemption applies. If no exemption applies, the boxes are left blank or mentioned as “00.”<\/p>\n

Chapter 3 Withholding on Payments to Foreign Persons<\/h2>\n

Chapter 3 withholding rules apply to U.S.-sourced income paid to non-U.S. persons (foreign individuals, corporations, partnerships, etc.). The standard withholding rate is 30%, unless an exemption or tax treaty reduction applies.<\/p>\n

Box 3a<\/strong> is used to report why the payment is exempt from Chapter 3 withholding.<\/p>\n

Code 01: Effectively Connected Income (ECI)<\/h5>\n

If the income is effectively connected with a U.S. trade or business, it is subject to taxation at regular U.S. income tax rates instead of being withheld at source. The recipient must also provide Form W-8ECI to the withholding agent.<\/p>\n

Code 02: Exempt Under Internal Revenue Code (IRC)<\/h5>\n

Used when a payment is exempt from withholding under a specific section of the Internal Revenue Code, but does not qualify under other Chapter 3 codes.<\/p>\n

Code 03: Income Is Not From U.S. Sources<\/h5>\n

Used when the payment is from a foreign source and not subject to U.S. withholding.<\/p>\n

Code 04: Exempt Under Tax Treaty<\/h5>\n

Used when a tax treaty allows for a reduced rate or exemption. The recipient must provide Form W-8BEN or W-8BEN-E.<\/p>\n

Code 05: Portfolio Interest Exempt Under IRC<\/h5>\n

Used for qualifying portfolio interest payments, typically on registered corporate or government bonds.<\/p>\n

Code 06: Qualified Intermediary (QI) That Assumes Primary Withholding Responsibility<\/h5>\n

Used when a QI takes full withholding responsibility under an IRS agreement.<\/p>\n

Code 07: Withholding Foreign Partnership (WFP) or Withholding Foreign Trust (WFT)<\/h5>\n

Used when a WFP or WFT acts as a withholding agent on behalf of its beneficiaries or partners.<\/p>\n

Code 08: U.S. Branch Treated as a U.S. Person<\/h5>\n

Used when a U.S. branch of a foreign FI elects U.S. person treatment for tax purposes.<\/p>\n

Code 10: Qualified Intermediary (QI) Represents That Income Is Exempt<\/h5>\n

Used when the QI does not assume withholding responsibility but certifies the income is exempt.<\/p>\n

Code 11: Qualified Securities Lender (QSL) That Assumes Primary Withholding Responsibility<\/h5>\n

Used when a QSL takes responsibility for substitute dividend withholding and provides Form W-8IMY.<\/p>\n

Code 12: Payee Subject to Chapter 4 Withholding<\/h5>\n

Used when a payment is already subject to Chapter 4 (FATCA) withholding and not Chapter 3.<\/p>\n

Code 22: Qualified Derivatives Dealer (QDD) That Assumes Primary Withholding Responsibility<\/h5>\n

Used when a QI acts as a QDD responsible for dividend equivalent withholding.<\/p>\n

Code 23: Exempt Under Section 897(l) (Qualified Foreign Pension Fund)<\/h5>\n

Used when distributions are made to a qualified foreign pension fund and exempt under IRC Section 897(l).<\/p>\n

Code 24: Exempt Under Section 892 (Foreign Governments and International Organizations)<\/h5>\n

Used when foreign governments or eligible international organizations are exempt under IRC Section 892.<\/p>\n

Chapter 4 FATCA (Foreign Account Tax Compliance Act) Withholding<\/h2>\n

Chapter 4 withholding applies under FATCA and primarily targets foreign financial institutions (FFIs) and certain non-financial foreign entities (NFFEs) that do not comply with FATCA reporting requirements. The standard FATCA withholding rate is 30%.<\/p>\n

Box 4a<\/strong> is used to report why the payment is exempt from Chapter 4 withholding.<\/p>\n

Code 13: Grandfathered Payment<\/h5>\n

Used for payments under agreements executed before July 1, 2014, exempt from FATCA withholding.<\/p>\n

Code 14: Effectively Connected Income (ECI)<\/h5>\n

Used when income is ECI and taxed at regular U.S. income tax rates. Form W-8ECI is required.<\/p>\n

Code 15: Payee Not Subject to Chapter 4 Withholding<\/h5>\n

Used for payments not subject to FATCA due to the payee\u2019s classification or during the grace period.<\/p>\n

Code 16: Excluded Nonfinancial Payment<\/h5>\n

Used for nonfinancial payments like wages, leases, or service payments that are not subject to FATCA.<\/p>\n

Code 17: Foreign Entity That Assumes Primary Withholding Responsibility<\/h5>\n

Used when a QI, WP, or WT agrees to assume FATCA withholding responsibilities.<\/p>\n

Code 18: U.S. Payees of a Participating FFI or Registered Deemed-Compliant FFI<\/h5>\n

Used for U.S. account holders of compliant FFIs. Not subject to FATCA withholding but reportable income.<\/p>\n

Code 19: Exempt from Withholding Under an Intergovernmental Agreement (IGA)<\/h5>\n

Used when the payment is exempt under an IGA between the U.S. and the payee\u2019s country.<\/p>\n

Code 20: Dormant Account<\/h5>\n

Used for payments allocable to dormant accounts per FATCA rules.<\/p>\n

Code 21: Other Payment Not Subject to Chapter 4 Withholding<\/h5>\n

General code for non-withholdable payments not covered by other exemptions (e.g., return of capital).<\/p>\n

File Form 1042-S Online with Tax1099<\/h2>\n

Tax1099<\/a>, an IRS-authorized e-file provider, simplifies the 1042-S filing process by offering features like bulk e-filing, USPS address validation, and instant status updates. The deadline to file Form 1042-S is March 17, 2025<\/strong>.<\/p>\n

Automating Form 1042-S filing and leveraging bulk e-filing reduces administrative costs and minimizes penalties from incorrect filings.<\/p>\n

\n
Start E-Filing Now<\/a><\/div>\n<\/div>\n<\/blockquote>\n","protected":false},"excerpt":{"rendered":"

What Are Form 1042-S Exemption Codes? Form 1042-S, Foreign Person\u2019s U.S. Source Income Subject to Withholding, is used to report certain U.S.-sourced income paid to foreign persons and the amount of tax withheld. Two important boxes on this form are Box 3a (Chapter 3 Exemption Code) and Box 4a (Chapter 4 Exemption Code). These boxes […]<\/p>\n","protected":false},"author":3,"featured_media":3955,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[79],"tags":[601,600],"class_list":["post-3954","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-1042-forms","tag-1042-s-exemption-code","tag-1042s-exemption-code"],"acf":[],"yoast_head":"\nWhat are Form 1042-S Exemption Codes? | Tax1099 Blog<\/title>\n<meta name=\"description\" content=\"1042-S Exemption Codes\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.tax1099.com\/blog\/what-are-form-1042-s-exemption-codes\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What are Form 1042-S Exemption Codes? 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