The Form 1042 deposit rules
Form 1042 does not use the Form 941 monthly and semiweekly schedules. It has its own, built on quarter-monthly periods ending on the 7th, 15th, 22nd and last day of every month, sixty of them across the year's record of federal tax liability (IRM 20.1.4.11.1; Exhibit 20.1.4-8):
- $2,000 or more undeposited at the end of any quarter-monthly period: deposit "within three business days" after the period ends.
- $200 to under $2,000 undeposited at the end of a month: deposit by the 15th of the following month.
- Under $200 at the end of a month: carry it to the next month. In December, pay it with the return by the due date or deposit it by then.
- The record of federal tax liability (the 60 boxes) is required when the year's tax is $200 or more. If it is blank, incomplete or does not agree with the return, the IRS averages the tax into the even-numbered quarter-monthly periods, two per month (IRM 20.1.4.11.3), and a CP 207 proposes the penalty on that basis; reasonable cause is not considered until a good schedule exists (IRM 20.1.4.18.1(4)).
The penalty
- Tiers. 2% one to five days late, 5% six to fifteen, 10% more than fifteen days late, and 10% for a required deposit not made by EFT (IRM 20.1.4.7.1). A further 5% attaches to tax still unpaid ten days after the first notice; the calculator flags it but does not add it.
- Business days. Only Washington, D.C. legal holidays move a due date (IRM 20.1.4.7.3).
- Application. By default deposits go to the most recently ended period first (Rev. Proc. 2001-58; IRM 20.1.4.7.4(11)). Form 1042 is on the list of returns for which you may instead designate the order under IRC 6656(e) within 90 days of the notice's 23C date, and the IRS may not use the designation to raise the penalty (IRM 20.1.4.26.3). The designation request template is written for it.
- Safe harbor. A shortfall of no more than the greater of $100 or 2% of the required deposit is not penalized if it is made up by the earlier of the first Wednesday or Friday on or after the 15th of the following month and the return due date (IRM 20.1.4.8.7).
- December and the return. "If undeposited taxes are $200 or more and it is the end of December, any amount paid with the return may be subject to the 10 percent avoidance penalty" (IRM 20.1.4.6(9)). The exception for December undeposited tax applies to the carry-forward amount, not to skipped deposits earlier in the year.
Three things the 945 rules do not prepare you for
- Form 7004 extends the filing date, not the payment date (IRM 20.1.4.11(3)); failure-to-pay runs from March 15 regardless.
- The penalty does not recompute when 1042-S credits change. On the Form 1042 module (MFT 12) an FTD penalty "must be manually adjusted if there is a change to withholding credit"; it "will not systemically recompute" (IRM 20.1.4.22(6)). After amending 1042-S credits, ask for the penalty to be redone.
- Under-withheld tax goes through deficiency procedures. Tax that should have been withheld under IRC 1441 but was not reported on the 1042, and the FTD penalty on it, are subject to deficiency procedures; the penalty on tax that was reported is not (IRM 20.1.4.11.4).