Guide to Global Payroll Management - 2020 - D-114

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Guide to Global Payroll Management

Appendix D

Comprehensive example of how to complete Form 1042-S for gambling winnings.
DIRECT PAYMENT TO BENEFICIAL OWNER

ABC Casino ("WA"), a U.S. corporate withholding agent that is not a financial institution, makes a $10,000 payment of gambling winnings to A, a
foreign individual who has provided a Form W-8BEN to WA establishing foreign status. The gambling winnings are subject to 30% withholding as
there is no exemption available under the Code or applicable treaty. Before completing Form 1042-S, WA takes the following steps:

Step 1: Because the payment is a payment described in Amounts Subject to Reporting on Form 1042-S, WA determines it has a Form 1042-S filing
obligation.
Step 2: Because WA is making a payment of U.S. source FDAP income, WA determines the payment meets the definition of "an amount subject to
withholding" under chapter 3. Because gambling winnings are not treated as a "withholdable payment" under chapter 4 as it is an excluded
nonfinancial payment under Regulations section 1.1473-1(a)(4)(iii), WA determines that the payment is not subject to chapter 4 withholding.
Step 3: Because the payment is not subject to chapter 4 withholding but is an amount subject to withholding under chapter 3, WA determines that
chapter 3 is the correct chapter indicator. WA will thus enter a "3" in Box 3 (chapter indicator).
Note. Although the payment is properly classified as a chapter 3 payment, WA must complete certain boxes on Form 1042-S that pertain to
chapter 4 (see explanations for Boxes 4a, 4b, and 13g below).
WA must file a Form 1042-S for A, and complete it as follows.

Caution: Be sure to read the instructions for each box or field in its entirety before completing a box or field on Form 1042-S.

WA must provide a unique form identifier (UFI) in the applicable entry field at the top of Form 1042-S. For additional information, including UFI
requirements, see the instructions for Unique form identifier.
Box

Description

Required Entry

Income code

"28"

Gross income

"10,000"

Chapter indicator

"3"

Chapter 3 exemption code

"00"

Chapter 3 tax rate

"30.00"

Chapter 4 exemption code

"16"

Chapter 4 tax rate

"00.00"

Withholding allowance

Net income

7a
7b

Federal Tax Withheld

Check if federal tax withheld was not
deposited with the IRS because escrow
procedures were applied

Check if withholding occurred in
subsequent year with respect to a
partnership interest

Tax withheld by other agents

Overwithheld tax repaid to recipient
pursuant to adjustment procedures

Total withholding credit

Tax paid by withholding agent (amounts
not withheld)

12a

Withholding agent's EIN

12b-c

Withholding agent's chapter 3 and
chapter 4 status code

"3,000"

WA enters the gross amount paid (in whole dollars),
including withheld tax.

WA enters "3" to indicate that amounts were withheld
pursuant to chapter 3.
WA enters "00" because an amount was withheld
under chapter 3 and the tax rate is greater than zero
and is not due to backup withholding (see the
instructions for Boxes 3a and 4a, earlier).
WA enters "30.00" consistent with the formatting
specified in the instructions for Boxes 3b and 4b,
earlier.

WA enters "16" (excluded nonfinancial payment),
which is the appropriate two-digit code from the list of
Exemption Codes provided in Appendix B.
WA enters "00.00" because the amount reported in
Box 2 is not subject to chapter 4 withholding. See the
instructions for Boxes 3b and 4b.

WA leaves Box 5 blank because the income code it is
reporting in Box 1 is not one of the codes specified in
the instructions (see Box 5, earlier) for which box 5
reporting is required.
WA leaves Box 6 blank because it did not enter an
amount in Box 5.
WA enters "3,000" (30% of $10,000).

WA does not check the box because it is not using the
escrow procedure.
WA does not check the box because it did not withhold
in a subsequent year.
WA leaves Box 8 blank because tax was not withheld
by other withholding agents.

"3,000"

WA leaves Box 9 blank because it did not repay
overwithheld tax to the recipient under the
reimbursement procedure or the set-off procedure. For
more information, see the instructions for Box 9.
WA enters "3,000" (combining Boxes 7a, 8, and 9)

WA leaves Box 11 blank because it withheld on the
payment to the recipient (as opposed to paying the tax
from its own funds). For more information, see the
instructions for Box 11, tax paid by withholding agent
(amounts not withheld).

Although WA's EIN is not specified in this example, this
Specific information required is a required field that WA would complete.

"15" and "02"

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D-114

Comments

WA enters "28" (Gambling winnings), which is the
appropriate two-digit code from the list of income
codes provided in Appendix A.

WA enters "15" in Box 12b and "02" in Box 12c
because it is a U.S. corporate withholding agent that is
not a financial institution.
Note. WA must enter both a chapter 3 and a chapter 4
withholding agent status code regardless of the type of
payment being reported.

Guide to Global Payroll Management - 2020

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