It’s March, and for many businesses and government agencies, the race is on to file complete accounting information with the IRS, especially using Form 1042-S.
wendy walkerSolution Principal, Sobostold PYMNTS that companies operating internationally grapple with ongoing reporting and coordination challenges.
As she explained, Form 1042-S reports payments of U.S. income paid to nonresident taxpayers.
“All kinds of businesses, governments, trusts, states report this Form 1042-S for different types of payments,” she told PYMNTS.
Walker said the same accounts payable operations of these entities and businesses that issue 1099-NECs for payments related to services performed by non-employees should also issue 1042-S. . Payment processors must do the same for card transactions paid to merchants.
Walker noted that there are some additional requirements for collecting and coordinating all data.
“Payers that issue and file these 1042-S forms must also issue and file Form 1042,” she said.
The latter filing consolidates income taxes and withholding taxes into specific IRS categories and requires everything to match between the 1042 and 1042-S.
Given that there are more than 30 types of returns that report income paid by U.S. taxpayers, and the 1042 is the “catch-all” form that reports all types of income, including interest, dividends, interest, etc. Easier said than done. Royalty. Form issuers must navigate 400 different codes to identify the type of income paid and taxes withheld.
“Payers will need to track the details of these payments throughout the year they are made and reconcile them for annual reporting,” Walker said. “This is very complex and is one of the most complex information declarations a payer has to issue.”
The process becomes even more complex when you consider the fact that so much data is entered manually via Excel spreadsheets and other back-office functions.
Beginning with the 2023 tax year, Form 1042-S must be filed electronically under the 10 or more information return standard. This form must be submitted to the IRS’ File Information Returns Electronically (FIRE) system by March 15th.
Regarding Form 1042, the IRS announced in Notice 2024-26 that it would postpone the eFile standard and allow both U.S. and non-U.S. withholding agents to file the form on paper for their 2023 return. . However, regardless of filing method, Form 1042 must be filed with the IRS by March 15th. Starting with the 2024 filing, every U.S. withholding agent will be required to file Form 1042 through his IRS’ modernized eFile portal, separate from other digital filing channels to the government.
Filers can request an extension, but they must overcome several hurdles to do so. The request for an extension must be faxed to her IRS with detailed reasons for granting the extension.
Penalty
The IRS will force you to report it just like any other return, and penalties may apply.
Walker said the penalties are adjusted annually for inflation, and for companies that may file thousands of 1042-S filings on an annual basis, penalties can reach hundreds of thousands of dollars. That’s what it means. If you file after the deadline, you can be fined hundreds of dollars per return, meaning penalties can reach into the millions of dollars.
One of the best ways to stay in sync and align with IRS requirements is to take advantage of automated solutions from providers like Sovos, Walker said.
The benefit lies in the fact that “when you consume transactional data and consume that 1042-S data, you can easily pull out the information you need to ‘land’ on the 1042.”
