Reporting withholding tax for foreigners using 1042 and 1042S Forms

As the boundaries between countries blur and the whole world turn into one global village, especially in the aspect of trade and the economy, the creation of international trade ties was encouraged. Indeed, for the last decade, the United States has been saturated with real estate investors, but also by people from the tech industry, lawyers, doctors, merchants, as well as Israeli students and Ph.D. students.

However, along with the development of trade and economic relations, a strict taxation regime that applies to foreign citizens and foreign companies that generate income within the United States has also developed. Many of these “new investors” are unfamiliar with the tax liabilities that apply to them.

In the article here we will address the tax deduction that applies to Israelis in the United States and focus on forms 1042 and 1042. We will explain the obligation to deduct tax at source and the individual use of the above forms.

This is only part of a broad body of tax provisions that apply to foreigners in the United States, and therefore we will recommend the reading of the other guides listed on the site that will be able to provide an overview of these tax provisions. Of course, we are at your disposal, and we will be happy to lend our extensive experience and assist in any question and matter.


The Obligation to deduct tax at the source

In an attempt to prevent tax evasion by foreign citizens and entities, as well as to prevent tax evasion on the part of foreign entities with income originating in the United States, the United States requires strangers to deduct tax at source.

In fact, any income of a foreign entity originating in the United States requires the income transferer – whether it is an employer or another party – to serve as an “agent” of the U.S. Tax Authority and to deduct from the income a tax rate of 30% (a few exceptions are set out in the law).

Here are some of the taxable incomes:

  • Salary
  • Wages
  • Rent
  • Dividend
  • Allowance
  • Rewards
  • Compensation
  • Premiums
  • Scholarships


This means that in each of the above cases one should deduct from the income amount tax at a rate of 30% (for some types of income the tax rate might be lower) and transfer it to the U.S. Tax Authority.

In this way, it is guaranteed that those foreign entities to which the payment was transferred will submit the tax reports on their activities. Their activity will be taxed in accordance with the rules applicable to it, and they will be able to request a refund for the tax surplus if such a surplus exists.

It should be noted that in light of the double tax treaty signed by Israel and the United States, some of the above revenues will be tax-free. Also, note that it is possible that by correctly classifying the type of income one will be able to avoid tax deductions or at the very least reduce its rate. Therefore, we will strongly advise examining each matter on its own merits with a qualified professional.

Tax deduction agents are obligated to report the tax deduction and transfer it to the U.S Tax Authority. This is done using 1042 and 1042s forms, as described below. (More information about taxes’ forms)


Reporting withholding tax for foreigners – Form 1042S

Form 1042S (also titled Foreign Person’s U.S. Source Income Subject to Withholding), is used by various entities to report taxable foreign income (as stated, a foreign citizen or a foreign corporation that has income originating in the United States).

The reporting form on the taxable income must be submitted even if in practice no tax is originally deducted due to expatiations originating from the double taxation treaty.

In addition to submitting the form to the U.S. Tax Authority, the aforementioned form must be submitted to the foreign entity. The date of filing the report is April 15, together with the General Income Tax Report of the agent.

Israeli citizens and Israeli companies with a source of income in the United States should know the form and request it from the deduction agent, in order to facilitate the tax refund requirement later. In addition, Israeli citizens and companies should be familiar with the above form and use it when they employ foreign citizens in their businesses in the United States.


Reporting withholding tax for foreigners – Form 1042

In addition to reporting the funds transferred to the foreign entity, the deduction agent must also report on the scope of the tax deduction made. That is, while Form 1042s is used to report the scope of revenue, Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons) is used to report the scope of the deduction.

In fact, both forms will be submitted together, at the same time, and together with the annual income tax report. However, unlike Form 1042s, Form 1042 must be submitted only to the U.S. Tax Authority, and it does not need to be submitted in addition to the foreign entity from which the tax was originally taxed.

Israeli citizens and corporations should be familiar with the above form and use it if they employ foreign citizens themselves, and in their role as providers of such services, they are not required to use the form.


Differences between Form 1042S and Form 1042

1042s 1042
Who files the form? The agent The agent
What is reported? Taxable revenues transferred to a foreign entity The amount of tax deducted from taxable revenues transferred to foreign entities
When to file the report? April 15, along with the annual Tax return April 15, along with the annual Tax return
Where to file the report? The I.R.S and the foreign entity receiving the revenues Only to the I.R.S
When is it relevant to Israeli citizens? 1)      Israeli citizens and Israeli companies with taxable revenues originating from the United States

2)      Israeli citizens and Israeli companies with revenues originating from the United States and that employ foreign citizens (not American) in the United States.

Israeli citizens and Israeli companies with taxable revenues originating from the United States and that employ foreign citizens (not American) in the United States


As with any matter here, knowledge is power. U.S. tax provisions are complex and complicated, but with professional assistance, you can minimize tax liabilities. Thus, sometimes it is possible through the correct classification of the type of income to avoid withholding tax or at the very least reduce the rate deducted.

Are you Israeli citizens with incomes originating in the United States? Employers of foreign citizens in the United States? Don’t know if you need to file form 1042? Want to minimize the withholding rate? Or maybe you need to contact the U.S. Tax Authority to get a refund on the tax surplus that was originally taxed? The professional and experienced staff of MasAmerica will be happy to answer any questions.

The aforesaid should not be regarded as legal advice. It is advisable to consult with the MasAmarika team before any action. The service is provided by a professional team, fluent in English and Hebrew, and includes attorneys and accountants with American licenses.

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