1042-S - Changes to 2016 Report of Foreign Persons' U.S. Source Income Subject to Withholding

Higher Education|Not-for-Profit|Tax

By Ellen Martin

With the end of the year close in sight, changes to 2016 tax reporting will become a popular topic of discussion. Due dates for returns of partnerships, S-corporations and C- corporations are changing, as well as the due date and certain reporting requirements for 1099 information returns. For higher education institutions, noteworthy changes are being made to the Form 1042-S.


Form 1042-S is used to report payments made to foreign recipients, whether to an individual or entity. In some instances, the payer is required to withhold a certain amount of tax, the default amount being 30%. The payee may be excluded from withholding if certain exceptions or conditions of a foreign tax treaty are met. A common example of a payment reported on Form 1042-S is a scholarship awarded to a foreign university student that exceeded the cost of qualified tuition, room and board.

Changes to the Form

The 1042-S requires common information such as name, address, foreign country and identification number for both the payer and payee of the transaction. It also identifies what types of payers and recipients are involved, i.e.: individual, estate, tax-exempt organization, corporation, etc. Most important, the Form 1042-S must show how much the recipient was paid, any amount withheld and the rate at which the taxes were withheld.

For 2016, all of the above information is still required, in addition to a few new items:

  • Box 13j - limitation of benefits (LOB) code - Used to explain that a recipient entity (not individual) has provided documentation related to an income tax treaty and receives reduced withholding rates. LOB code explanations can be found in the instructions to Form W-8BEN-E. The Form 1042-S instructions also note that withholding agents (payers) "are not required to obtain new documentation unless they are otherwise required to do so."
  • Box 13k - Recipient account number - Payers may assign a payee a unique account number.
  • Box 13l - Recipient's date of birth
  • Also, if the recipient's information is unknown, the recipient's country code is left blank, and "unknown recipient" should be entered for the recipient's name.

While most of the changes require minor additional record-keeping from higher education institutions, the addition of the LOB codes highlight something essential: It will be important to verify that recipients claiming a reduction in withholding meet the requirements of an applicable income tax treaty. Institutions have until March 15 after the close of the tax year to gather their information and file Forms 1042-S. Forms 1042-S for 2016 are due to the IRS by March 15, 2017, with a possible 30-day extension.

Contact us if you have any questions regarding Form 1042-S and visit the Our Thoughts On blog for more articles pertaining to the not-for-profit sector.   

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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