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IRS.gov Website
Instructions for Form 1042-S
taxmap/instr2/i1042s-020.htm#en_us_publink64278ad0e3488

taxmap/instr2/i1042s-020.htm#TXMP61f5f65f
Box 3 (p24)

rule
taxmap/instr2/i1042s-020.htm#en_us_publink100041007
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Chapter indicator.(p24)
rule
If you are reporting amounts in boxes 7 through 9, enter either a 3 or 4 to indicate whether the amounts were withheld (or paid by the withholding agent) pursuant to chapter 3 or chapter 4. If you are reporting tax withheld under section 5000C, or backup withholding was applied under the presumption rules, enter 3 as if the tax were a chapter 3 tax.
taxmap/instr2/i1042s-020.htm#TXMP7c9e3403
Note.(p24).
Either a 3 or 4 must be entered on each Form 1042-S, not both. If you are not reporting amounts in boxes 7 through 9 because you did not withhold under chapter 3 or 4, you should enter 3.

If you are reporting payments to U.S. payees, enter 3 and leave boxes 3a and 3b blank.

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Boxes 3a (Ch 3 Withholding) and 4a (Ch 4 Withholding), Exemption Code(p24)

rule
In most cases, if the tax rate you entered in box 3b or 4b is 00.00, you may be required to enter the appropriate exemption code (01 through 22) from Income Codes, Exemption Codes, and Recipient, Withholding Agent, or Intermediary Codes, earlier, as applicable for chapter 3 and 4 purposes. In certain cases more than one exemption code will apply; see below instructions for the applicable codes to determine which code to use.
If an amount was withheld under chapter 4 (the tax rate you entered in box 4b is greater than zero and is not due to backup withholding), enter 00 in box 4a. If the tax rate you entered in box 4b is 00.00, you must enter the applicable exemption code (13-22) in box 4a. If an amount was withheld under chapter 3 (the tax rate you entered in box 3b is greater than zero and is not due to backup withholding), enter 00 in box 3a. If the tax rate you entered in box 3b is due to backup withholding, leave box 3a blank.
If exemption code 01 or 14 (effectively connected income) applies, you must enter the recipient's U.S. TIN in box 13e if you report the income as effectively connected with a U.S. trade or business. If the recipient's U.S. TIN is unknown or unavailable, you must withhold tax at the rate of 30% (30.00) and enter 00 in box 4b or 3b (as applicable).
A withholding agent should use exemption code 06 (QI that assumes primary withholding responsibility) only if it is making a payment to a QI that has represented on its Form W-8IMY that it is assuming primary withholding responsibility under chapters 3 and 4.
A withholding agent should use exemption code 07 (WP or WT) only if it is making a payment to a foreign partnership or trust that has represented on its Form W-8IMY that it is a withholding foreign partnership or trust.
A withholding agent should use exemption code 08 (U.S. branch treated as U.S. person) or 09 (territory FI treated as U.S. person) (as applicable) for chapter 3 purposes only if it is making a payment to a U.S. branch or to a territory FI and it has represented on its Form W-8IMY that it agrees to be treated as a U.S. person.
A withholding agent should use exemption code 10 (QI represents that income is exempt) for chapter 3 purposes only if it makes a payment to a QI that has not assumed primary withholding responsibility under chapters 3 and 4 or primary backup withholding responsibility, but has represented on a withholding statement associated with its Form W-8IMY that the income is exempt from withholding.
A withholding agent should use exemption code 11 (QSL that assumes primary withholding responsibility) for chapter 3 purposes only if the withholding agent makes a substitute dividend payment to a financial institution (including a QI) that represented on its Form W-8IMY that it is acting as a QSL for the account associated with the form.
A withholding agent should use exemption code 12 (payee subjected to chapter 4 withholding) for chapter 3 purposes if the recipient has been withheld upon under chapter 4 and thus chapter 3 withholding does not apply. See Special Instructions for use of Chapter 3 Exemption Codes, later.
A withholding agent should use exemption code 13 (grandfathered payment) for chapter 4 purposes only if the withholding agent makes a payment under a grandfathered obligation and exemption code 13 is the only exemption code that applies. If another exemption code applies, it should be used instead of exemption code 13.
A withholding agent should use exemption code 15 (payee not subject to chapter 4 withholding) for chapter 4 purposes if the payment is a withholdable payment (as defined in Regulations section 1.1473-1(a)), but has not been withheld upon under chapter 4 because of the payee's chapter 4 status. Also, if the withholding agent applies the 90-day grace period for a withholdable payment following a change in circumstances, use exemption code 15 (payee not subject to chapter 4 withholding).
A withholding agent should use exemption code 16 (excluded nonfinancial payment) for chapter 4 purposes only if exemption code 16 is the only exemption code that applies. If another exemption code applies, it should be used instead of exemption code 16.
A withholding agent should use exemption code 17 (foreign entity that assumes primary withholding responsibility) for chapter 4 purposes only if it makes a payment to a QI that assumes primary withholding responsibility, a WP, or a WT.
A withholding agent should use exemption code 18 (U.S. payees – of participating FFI or registered deemed-compliant FFI) for chapter 4 purposes only if it makes a payment to a participating FFI or registered deemed-compliant FFI and only to the extent represented on such FFI's withholding statement associated with its Form W-8IMY that the payment is allocable to a chapter 4 withholding rate pool of U.S. payees and FFI certifies on its withholding certificate that the FFI meets the requirements to include the account holder in a withholding rate pool of U.S. payees.
A withholding agent should use exemption code 20 (dormant account) for chapter 4 purposes only if it makes a withholdable payment to a participating FFI or registered deemed-compliant FFI that represented on its withholding statement associated with its Form W-8IMY that the payment is allocable to a dormant account holder for which the escrow procedure of Regulations section 1.1471-4(b)(6) applies.
A withholding agent should use exemption code 21 (excluded payment on offshore obligation) for chapter 4 purposes for a payment that is excluded from the definition of a withholdable payment under Regulations section 1.1473-1(a)(4)(vi). A withholding agent should also use exemption code 21 for any sale or distribution that is an amount subject to withholding under chapter 3 but is not a witholdable payment under Regulations section 1.1473-1(a)(1)(ii). If another exemption code applies, it should be used instead of exemption code 21. The exemption for these types of payments will end for payments made after December 31, 2016.
A withholding agent should use exemption code 22 (excluded payments on collateral) for chapter 4 purposes for a payment made with respect to a collateral arrangement that is excluded from the definition of a withholdable payment under Regulations section 1.1473-1(a)(4)(vii). If another exemption code applies, it should be used instead of exemption code 22. The exemption for these types of payments will end for payments made after December 31, 2016.
If you have failed to provide another withholding agent with appropriate information regarding the status of the person to whom you are making a payment, the other withholding agent may be required to withhold on the payment based on the presumption rules. If the income is in fact exempt from withholding or subject to a reduced rate of withholding, and the account holder requests a corrected form, you must submit a Form 1042-S providing the correct information. In this situation, you must:
caution
If you must submit Form 1042-S, you must also submit Form 1042.
taxmap/instr2/i1042s-020.htm#en_us_publink1000307226
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Special instructions for use of chapter 3 exemption codes.(p25)
rule
If an amount was withheld under chapter 4, you may also include a chapter 3 exemption code and tax rate in boxes 3a and 3b to show the rate that would otherwise apply if the payment was exempt from withholding under chapter 4. This may be done, for example, to assist the beneficial owner in pursuing a claim for refund. In such a case, only enter 4 as the chapter indicator in box 3 to show that withholding was applied under chapter 4.
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Boxes 3b (Ch 3 Withholding) and 4b (Ch 4 Withholding), Tax Rate(p25)

rule
Enter the correct rate of withholding that applies to the income in box 2 (gross income) or box 6 (net income), as appropriate. In the case of a payment subject to chapter 4 withholding, the correct rate of withholding is 30.00. If the amount reported in box 2 is not subject to chapter 4 withholding or is not a withholdable payment, you must enter 00.00 in box 4b and provide the applicable exemption code in box 4a. For purposes of chapter 3 withholding, see Valid Tax Rate Table, later. The correct tax rate should be included even if you withheld at a different rate. For example, if an NQI that is a participating FFI is reporting dividends paid to a beneficial owner who is exempt from withholding under chapter 4 and a resident of a country with which the United States does not have a tax treaty and a U.S. withholding agent paid the dividend and incorrectly withheld only 15% under chapter 3 (rather than the required 30%) and the NQI withholds an additional 15% under chapter 3, the NQI should report 30.00 in box 3b. See Example 18. in Multiple Withholding Agent Rule, earlier. The tax rate on dividends paid to a corporation created or organized in, or under the law of, the Commonwealth of Puerto Rico may be 10%, rather than 30%. See Pub. 515 for more information.
In the case of a specified Federal procurement payment subject to section 5000C withholding, the correct rate of withholding is 2% or 02.00. For Form 1042-S purposes, report tax withheld under section 5000C in box 3b as if the tax were a chapter 3 tax.
Enter the tax rate using the following format: two digits, a decimal, and two digits (for example,30.00 for 30%). However, if the income is exempt from tax under a U.S. tax treaty or the Code, enter 00.00. If the tax rate is less than 10%, enter a zero before the tax rate (for example, “04.00” for 4%).
caution
If you withheld at more than one tax rate for a specific type of income that you paid to the same recipient, you must file a separate Form 1042-S for each amount to which a separate rate was applied.
Valid Tax Rate Table
00.0008.0020.00
02.0010.0025.00
04.0012.0027.50
04.9012.5028.00
04.9514.0030.00
05.0015.0035.00
07.0017.5039.60
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Exception for central withholding agreements.(p25)
rule
If you are the designated withholding agent who has entered into a central withholding agreement and you report an amount in box 2 using income code 43 (earnings as an artist or athlete—central withholding agreement), you do not have to enter a tax rate in box 3b but you must include a chapter 4 exemption code 16 (excluded nonfinancial payments) in box 4a.