Exemption Code 04 on Form 1042-S means the withholding agent reduced or eliminated U.S. withholding on a payment to a foreign person because an income tax treaty between the United States and the recipient’s country of residence allowed it. The code appears in Box 3a, the chapter 3 exemption field, and the country shown in Box 13b must be a country that actually has a treaty with the United States.1Internal Revenue Service. Instructions for Form 1042-S Without a treaty, the default rate on U.S.-source income to a foreign person is a flat 30% under Chapter 3 of the Internal Revenue Code.2Internal Revenue Service. Tax Withholding Types Code 04 is the signal that something lower was applied, and that the authority for the lower rate was a treaty rather than the Code itself.
The reduction can be partial or complete. Some treaties cut the dividend rate to 15% or 5%; others wipe out withholding on royalties entirely. Code 04 covers the whole range. Common income types where treaties come into play include interest, dividends, royalties, and certain personal service income.3Internal Revenue Service. Claiming Tax Treaty Benefits Every payment of U.S.-source income to a foreign person is reported on 1042-S even when nothing is withheld, so a form with zero in Box 7 and Code 04 in Box 3a is normal, not an error.4Internal Revenue Service. Who Must File Form 1042-S
When Code 04 Is the Wrong Choice
The most frequent misuse is picking Code 04 when Code 02 is correct. Code 02 means “exempt or reduced withholding under IRC.” It applies where the Internal Revenue Code itself provides the exemption, with no treaty involved. The portfolio interest exemption is the classic case: under IRC Section 871(h), interest on certain registered obligations paid to a foreign person who is not a 10-percent shareholder is exempt from the 30% tax without any treaty.5Office of the Law Revision Counsel. 26 US Code 871 – Tax on Nonresident Alien Individuals
The reason the distinction matters: Code 04 requires a valid treaty country in Box 13b. Using Code 04 for a portfolio interest payment creates a mismatch that can prompt an IRS inquiry. The rule is simple. Exemption from a treaty, use Code 04. Exemption from the Internal Revenue Code, use Code 02.1Internal Revenue Service. Instructions for Form 1042-S
What the Recipient Must Give the Agent First
A withholding agent cannot apply Code 04 unless the foreign recipient has certified eligibility for the treaty benefit on the right Form W-8, delivered before the payment.
- Nonresident alien individuals use Form W-8BEN. The form declares foreign status and identifies the specific treaty article supporting the reduced rate.6Internal Revenue Service. About Form W-8 BEN
- Foreign corporations, partnerships, and other entities use Form W-8BEN-E. Part III of that form is where the treaty claim goes.7Internal Revenue Service. Form W-8BEN-E
Treaty claims generally require a U.S. taxpayer identification number (SSN or ITIN) on the W-8. Without a reliable Form W-8, the agent must default to 30% withholding, even if it is sure the recipient would qualify.8Internal Revenue Service. Instructions for the Requester of Forms W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, and W-8IMY
Expiration depends on whether a U.S. TIN is on the form. A W-8BEN submitted without a TIN expires on the last day of the third calendar year after signing. A W-8BEN submitted with a U.S. TIN stays valid indefinitely, unless a change in the recipient’s circumstances makes anything on the form inaccurate.9Internal Revenue Service. Instructions for Form W-8BEN
Reading the Rest of the Form
Code 04 does not sit alone. A recipient checking a 1042-S for accuracy should look at how the surrounding boxes line up with it.
- Box 2 shows the gross income, the full payment amount regardless of withholding.
- Box 3a holds the two-digit exemption code; “04” belongs there, not elsewhere.10Internal Revenue Service. Form 1042-S
- Box 3b shows the treaty rate actually applied. A full exemption reads 00.00; a 15% rate reads 15.00.
- Box 7 shows the federal tax withheld in dollars. Zero is correct when the treaty fully exempts the income.
- Box 13b must carry the country code for a country with a U.S. income tax treaty. A non-treaty country here with Code 04 in Box 3a is inconsistent on its face.
If Box 3b shows a rate higher than the treaty actually allows, or Box 13b lists the wrong country, the math in Box 7 will be off too. Catching that before filing is easier than correcting it later.
What To Do With a Code 04 Form
If you are a foreign person holding a 1042-S with Code 04, it is telling you the withholding agent applied treaty benefits to your U.S.-source income. In many cases you will not need to file a U.S. return at all. A nonresident alien who was not engaged in a U.S. trade or business during the year, and whose U.S. tax was fully covered by withholding or fully exempt under a treaty, generally does not need to file Form 1040-NR.11Internal Revenue Service. Instructions for Form 1040-NR
Filing still makes sense in two situations. If the agent withheld more than the treaty rate required, you may be owed a refund, and Form 1040-NR is how you claim it. If the treaty reduced the rate without eliminating it, check that Box 7 matches the correct treaty rate applied to the gross income in Box 2. Errors on 1042-S forms happen, and they are easier to fix before a deadline than after.
Agent Due Diligence and Penalty Exposure
Collecting a signed W-8 is necessary but not enough. The agent must determine the documentation is reliable before applying any reduced rate. Publication 515 treats a withholding certificate as unreliable if it is incomplete, contains inconsistent information, lacks details needed to support a reduced rate, or conflicts with other information the agent has on file.12Internal Revenue Service. Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities
In practice, that means questioning a treaty claim when, for example, the recipient’s mailing address sits in a country different from the treaty country on the W-8, or when the recipient invokes a treaty article that does not cover the type of income being paid. If the agent fails to withhold and cannot show due diligence, it can be personally liable for the unpaid tax plus penalties and interest.2Internal Revenue Service. Tax Withholding Types W-8 forms should be kept as long as they may be relevant to determining the agent’s liability, not discarded on a fixed schedule.8Internal Revenue Service. Instructions for the Requester of Forms W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, and W-8IMY
Separate from the tax itself, the IRS imposes information-return penalties on agents that file incorrect or late Forms 1042-S or fail to furnish correct copies to recipients. For returns due in 2026, the tiers are:13Internal Revenue Service. Instructions for Form 1042-S (2026)
- Corrected within 30 days: $60 per form, maximum $698,500 per year ($244,500 for small businesses with average annual gross receipts of $5 million or less).
- Corrected after 30 days but by August 1: $130 per form, maximum $2,095,500 ($698,500 for small businesses).
- Filed after August 1 or not filed: $340 per form, maximum $4,191,500 ($1,397,000 for small businesses).
- Intentional disregard: the greater of $690 per form or 10% of the total amount required to be reported, with no cap.
These penalties stack with any liability for tax that should have been withheld. An agent that applies Code 04 incorrectly and withholds nothing when 30% was owed can face both.
Filing Deadline
Form 1042-S must be filed with the IRS and furnished to the recipient by March 15 of the year following the calendar year of payment. If March 15 falls on a weekend or legal holiday, the deadline moves to the next business day.13Internal Revenue Service. Instructions for Form 1042-S (2026) Recipients expecting a Code 04 form should have it in hand by then; if it hasn’t arrived and the payment was made in the prior calendar year, that is a reason to contact the withholding agent.