Here’s how IRS Form 1042-S might apply to scenarios involving a book publisher which may need to report U.S.-source income payments to foreign recipients.
Scenario 1: Book Publisher and Foreign Author Royalties
Suppose a U.S.-based book publisher pays royalties to a foreign author who resides outside the United States. These royalty payments are considered U.S.-source income because they originate from the U.S. company.
- Withholding Requirement: The book publisher, as the withholding agent, is required to withhold a percentage of the royalty payment as federal income tax and remit it to the IRS. The standard withholding rate is 30%, but this can be reduced if the foreign author qualifies for a tax treaty benefit (for instance, a treaty that reduces withholding on royalties to 10%).
- Issuing Form 1042-S: At the end of the tax year, the publisher issues Form 1042-S to the foreign author. The form reports:
- The total amount of royalties paid (Box 2),
- The income type code for royalties (Box 1),
- The federal income tax withheld (Box 7),
- Any applicable tax treaty benefit and reduced rate (Box 3a).
- Recipient’s Use of Form 1042-S: The foreign author will use Form 1042-S to:
- Report the royalty income on their U.S. tax return (Form 1040-NR).
- Claim the withholding credit, which can offset any U.S. tax liability or result in a refund if the withholding exceeds the tax owed.
Form 1042-S serves as proof of the income received and the federal income tax withheld, allowing the foreign recipients to properly report their income and, if eligible, claim a refund for overpaid withholding.
