In the context of Form 1042-S, which reports U.S.-source income paid to nonresident aliens, there are various income codes used to identify the type of income being reported. These codes are crucial for understanding the type of income and how it is subject to U.S. tax withholding. Below is a list of the primary income codes used on Form 1042-S:
Common Income Codes on Form 1042-S
| Income Code | Description |
|---|---|
| 01 | Interest income (including interest on deposits, bonds, and other forms of interest-bearing securities). |
| 02 | Dividends (from U.S. corporations, mutual funds, or REITs). |
| 03 | Royalties (for the use of U.S. property, patents, copyrights, trademarks, etc.). |
| 04 | Rents (income from leasing property, such as real estate or equipment). |
| 05 | Compensation for independent personal services (nonemployee compensation, like fees for services provided by independent contractors). |
| 06 | Compensation for dependent personal services (income for services performed as an employee). |
| 07 | Scholarships and fellowships (taxable portion of scholarships and fellowships not used for tuition and related expenses). |
| 08 | Pensions and annuities (including distributions from retirement accounts, pensions, or annuity plans). |
| 09 | Compensation for personal services (Wages) (income for employment services). |
| 10 | Real property income (income from real estate investments such as rentals, sales, or leases). |
| 11 | Gambling winnings (reported if winnings are subject to tax withholding). |
| 12 | Short-term capital gains (profits from the sale of capital assets held for one year or less). |
| 13 | Long-term capital gains (profits from the sale of capital assets held for more than one year). |
| 14 | Other income (used for income types not covered by other specific codes, such as legal settlements, prizes, etc.). |
| 15 | Fixed or determinable annual or periodic income (FDAP) (this is a catch-all for many types of U.S.-source income that is fixed and periodic, such as interest, dividends, and royalties). |
| 16 | Scholarship or fellowship grants (tax-exempt) (income that is exempt from tax due to a treaty or other tax provision). |
Income Codes for Specific Payments
- Income Code 16 is used to report tax-exempt scholarships and fellowships (e.g., those exempt due to a tax treaty), which generally aren’t subject to withholding.
- Income Codes 07, 15, 11, and others may be applicable to specific scenarios like scholarships (for the taxable portion), gambling winnings, and capital gains (both short-term and long-term).
Income Codes for Payments to Foreign Students and Scholars
Foreign students and scholars are often recipients of scholarships, fellowships, or stipends that are taxable or exempt depending on the nature of the income and tax treaty provisions. In these cases:
- Income Code 07 is commonly used for scholarships or fellowships (if taxable).
- Income Code 16 may apply if the scholarship or fellowship is exempt from withholding due to a treaty.
Important Notes:
- Tax Withholding: The income code helps determine the appropriate tax withholding rate, which can vary depending on the type of income and any applicable tax treaties.
- Form 1042-S Box 15: This is the field where the income code is reported, and it identifies the nature of the income for the recipient and the IRS.
How to Use These Codes
When filing a U.S. tax return (e.g., Form 1040-NR for nonresident aliens), the income code from Form 1042-S provides important details that help identify the type of income and determine if any tax treaty benefits apply. The recipient should ensure they report the correct income type on their tax return.
