Guide to Global Payroll Management - 2020 - D-61

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Appendix D--Federal Forms and Instructions

amount of tax withheld with the IRS during
the year).

General Instructions

Purpose of Form

Use Form 1042 to report the following.
* The tax withheld under chapter 3
(excluding withholding under sections
1445 and 1446 except as indicated below)
on certain income of foreign persons,
including nonresident aliens, foreign
partnerships, foreign corporations, foreign
estates, and foreign trusts.
* The tax withheld under chapter 4 on
withholdable payments. For the
withholding requirements of chapter 4, see
Regulations sections 1.1471-2(a),
1.1471-4(b), and 1.1472-1(a).
* The tax withheld pursuant to section
5000C on specified federal procurement
payments.
* The tax withheld under section 877A on
payments of eligible deferred
compensation items or distributions from
nongrantor trusts to a covered expatriate.
* Payments that are reported on Form
1042-S under chapter 3 or 4. See
Regulations section 1.1474-1(d)(2)(i) for
the definition of a chapter 4 reportable
amount (which are amounts required to be
reported on Form 1042-S for chapter 4
purposes) and Regulations section
1.1461-1(c)(2) for amounts subject to
reporting for chapter 3 purposes.

Certain distributions subject to section
1445 withholding tax. Publicly traded
trusts, real estate investment trusts, and
regulated investment companies that are
qualified investment entities (as defined
under section 897(h)(4)) must withhold
section 1445 tax on certain distributions
and report such amounts on Form 1042.
For more information, see Regulations
section 1.1445-8 and the Instructions for
Form 1042-S.
Publicly traded partnerships (section
1446 withholding tax). For purposes of
reporting on Form 1042, a publicly traded
partnership (PTP) must withhold section
1446 tax on distributions of effectively
connected income (ECI) to its foreign
partners. A nominee that receives a
distribution of ECI from a PTP and is
treated as the withholding agent must use
Form 1042 to report the tax withheld. For
this purpose, a nominee is a domestic
person holding an interest in the PTP on
behalf of one or more foreign partners. For
more information, see Regulations section
1.1446-4 and Pub. 515, Withholding of
Tax on Nonresident Aliens and Foreign
Entities.

Who Must File

Every withholding agent or intermediary
who receives, controls, has custody of,

disposes of, or pays a withholdable
payment (to which chapter 4 withholding
applies) or an amount subject to
withholding, must file an annual return for
the preceding calendar year on Form 1042
unless an exception to filing applies. Also,
any PTP or nominee making a distribution
of ECI under section 1446, or any entity
required to report a distribution on Form
1042-S that is subject to withholding under
section 1445, must file Form 1042 for the
preceding calendar year.
You must file Form 1042 if any of the
following applies.
* You are required to file or otherwise file
Form(s) 1042-S for purposes of either
chapter 3 or 4 (whether or not any tax was
withheld or was required to be withheld to
the extent reporting is required). File Form
1042 even if you file Form(s) 1042-S
electronically.
* You file Form(s) 1042-S to report to a
recipient tax withheld by your withholding
agent.
* You pay gross investment income to
foreign private foundations that are
subject to tax under section 4948(a).
* You pay any foreign person specified
federal procurement payments that are
subject to withholding under section
5000C.
* You pay an eligible deferred
compensation item to a covered expatriate
or you are a trustee making a distribution
from a nongrantor trust to a covered
expatriate under section 877A.
* You are a qualified intermediary (QI),
withholding foreign partnership (WP),
withholding foreign trust (WT),
participating foreign financial institution
(FFI), or reporting Model 1 FFI making a
claim for a collective refund under your
respective agreement with the IRS. See
Regulations section 1.1471-1(b)(114) for
the definition of a reporting Model 1 FFI.

Withholding Agent

Any person required to withhold tax is a
withholding agent. A withholding agent
may be an individual, trust, estate,
partnership, corporation, nominee,
government agency, association, or
tax-exempt foundation, whether domestic
or foreign. For purposes of chapter 4, a
withholding agent includes a participating
FFI or registered deemed-compliant FFI to
the extent such FFI is required to withhold
tax. See Regulations section 1.1473-1(d)
for the definition of a withholding agent for
purposes of chapter 4.
Liability for tax. As a withholding agent,
you are personally liable for any tax
required to be withheld as well as interest
and any applicable penalties. A
withholding agent acting through an agent
is liable for any failure of the agent to
deposit any tax required to be withheld
and deposited even if the agent is also a
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withholding agent and is itself separately
liable for the failure to comply with the
provisions of chapter 3 or 4.
For purposes of chapter 3, if you fail to
withhold and the foreign payee fails to
satisfy its U.S. tax liability, then both you
and the foreign person are liable for tax,
as well as interest and any applicable
penalties. The applicable tax will be
collected only once. If the foreign person
satisfies its U.S. tax liability, you are not
liable for the tax but remain liable for any
interest and penalties for failure to
withhold.

Intermediary

An intermediary is a person who acts as a
custodian, broker, nominee, or otherwise
as an agent for another person, regardless
of whether that other person is the
beneficial owner of the amount paid, a
flow-through entity, or another
intermediary.

Qualified intermediary. A QI is an
intermediary (or in the case of a QDD, a
principal) that is a party to a QI Agreement
with the IRS described in Regulations
section 1.1441-1(e)(5)(iii). For information
on the QI Agreement, see IRS.gov/
Businesses/Corporations/QualifiedIntermediary-System.
Withholding foreign partnership or
withholding foreign trust. A WP or WT
is a foreign partnership or trust that has
entered into a withholding agreement with
the IRS described in Regulations section
1.1441-5(c)(2) and (e)(5) in which it
agrees to assume primary withholding
responsibility under chapters 3 and 4 for
all payments that are made to it for its
partners, beneficiaries, or owners.
Nonqualified intermediary. A
nonqualified intermediary (NQI) is any
intermediary that is not a U.S. person and
that is not a QI.

Nonwithholding foreign partnership. A
nonwithholding foreign partnership (NWP)
is a foreign partnership that is not a
withholding foreign partnership.
Nonwithholding foreign trust. A
nonwithholding foreign trust (NWT) is a
foreign trust that is not a withholding
foreign trust.

Qualified derivatives dealer (QDD). A
QDD is a qualified intermediary (QI) that is
an eligible entity that agrees to assume
the requirements of a QDD and the other
requirements in the QI Agreement. Any
applicable home office or branch that
seeks to be a QDD must qualify and be
approved for QDD status. A QDD must
document itself to a withholding agent with
a Form W-8IMY indicating that it is acting
as a QDD for payments with respect to
potential section 871(m) transactions and
underlying securities that it receives in a
Instructions for Form 1042 (2019)

D-61

Guide to Global Payroll Management - 2020

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