U.S.-source income payments to foreign persons that are subject to withholding or that are exempt from withholding under an Internal Revenue Code or income tax treaty provision must be reported on Form 1042-S. Unlike the rules for Form 1099, Form 1042-S is required whether or not the payer is engaged in a U.S.trade or business. There is no de minimis income rule for Form 1042-S reporting and no special exemption for corporate recipients.
The amount of the penalty for submitting Forms 1042-S is based on when the forms are submitted and the number of forms submitted. The penalty amount is computed as follows:
- $30 per Form 1042-S if correctly filed within 30 days. The maximum penalty is $250,000 per year ($75,000 for a small business).
- $60 per Form 1042-S if correctly filed more than 30 days after the due date but by August 1. The maximum penalty is $500,000 per year ($200,000 for a small business).
- $100 per Form 1042-S if correctly filed after August 1, or if required Forms 1042-S are not filed. The maximum penalty is $1,500,000 per year ($500,000 for a small business).
A small business is defined as a business having average annual gross receipts of $5 million or less for the three most recent tax years (or the period of existence of the business, if shorter) ending before the calendar year in which the Forms 1042-S are due.
If a withholding agent intentionally disregards the requirement to report correct information, the penalty per Form 1042-S is increased to $250 or, if greater, 10 percent of the total amount of the items that must be reported, with no maximum penalty.