Are you aware of the 1042-S reporting exclusions in terms of income payments not subject to NRA withholdings? The international tax experts at LSL CPAs are not surprised when clients reveal that they are unaware of the exclusions to 1042-S reporting. The 1042-S reporting exclusions are comprised of income payments not subject to NRA withholding. To be clear, if income is not subject to NRA withholding, then it does not have to be reported to the IRS on a 1042-S form.
The 1042-S Reporting Exclusions include:
- Income excluded from income under section 61 (e.g., qualified scholarships and fellowships).
- Proceeds on sales of U.S. real property interests by non-U.S. persons (use Form 8288).
- Partnership profits reported by the partnership to a foreign partner (use Form 8805).
- Wages that are subject to wage withholding (use Form W-2).
As you can see, the 1042-S Reporting Exclusions do not mean that the income payments excluded from the 1042-S are excluded from being taxed. What it means is that such wages often (but not always) need to be reported on a different form with the IRS. Although this may all sound and look confusing and complex, the international tax experts at LSL CPAs have both the experience and the expertise to handle such challenges of an almost Byzantine nature.
For example, wages exempt from wage withholding under an applicable tax treaty provision must be reported on a Form 1042-S. However, if a payment was erroneously subjected to NRA withholding, and the payment was not refunded, that payment and the taxes withheld must also be reported on Form 1042-S.
Another challenging example is foreign-source income. Such income usually is not reportable at all because it is not subject to U.S. income tax. A payer may, however, choose to report foreign-source income on a Form 1042-S in which case the Exemption Code is 03. Whether income paid is U.S. or foreign-source is determined under U.S. tax code rules that vary with the type of income paid.
Luckily, if you are faced with multiple forms of income from multiple sources as a foreign national or a representative of a foreign company or a foreign company doing business in the United States, the international tax experts at LSL CPAs can help you. The search for the answers and help that you need is only one phone call away.
For more information about Form 1042-S reporting exclusions and requirements, and what LSL CPAs can do for you, please call Yana Weaver at 714.569.1000.
Link to the “Foreign Person’s U.S. Source Income Subject to Withholding” Form 1042-S