U.S. · Payroll tax forms
Form 940 line 3, total payments to all employees.
What to include, even the payments that are exempt, and why line 4 comes next.
Line 3 is the total you paid all employees during the calendar year, including payments that are not taxable for FUTA. Your payment method does not decide whether something is wages. Exempt amounts are subtracted later on line 4, so they must be on line 3 first: the instructions say you only report a payment as exempt on line 4 if you included it on line 3.
Look up a Form 940 Line 3 item
Result
Form 940 Line 3 at a glance (2025 edition)
| Item | Meaning | What the IRS says |
|---|---|---|
| Compensation | Salaries, wages, commissions, fees, bonuses | Includes vacation allowances and amounts paid to full-time, part-time or temporary employees |
| Fringe benefits | Sick pay, goods, lodging, food, clothing | Includes sick pay (including third-party sick pay if liability is transferred to the employer), non-cash fringe benefits and section 125 (cafeteria) plan benefits |
| Retirement | 401(k), Archer MSA, adoption, SIMPLE | Includes employer contributions to a 401(k) plan, payments to an Archer MSA, adoption assistance payments and SIMPLE contributions (including elective salary reduction), plus amounts deferred under a non-qualified plan |
| Tips | $20 or more a month | Tips of $20 or more in a month that your employees reported to you |
| Predecessor pay | Acquired business | Payments made by a predecessor employer to the employees of a business you acquired |
| State-treated employees | Nonemployees | Payments to nonemployees who are treated as your employees by the state unemployment tax agency |
| Caution | FUTA vs state tax | Wages may be subject to FUTA tax even if they are excluded from your state’s unemployment tax |
Why exempt payments still go on line 3
Form 940 works down from total payments. Line 3 is everything paid; line 4 removes payments exempt from FUTA tax; line 5 removes pay above the $7,000 per-employee FUTA wage base; line 6 is lines 4 plus 5; and line 7, total taxable FUTA wages, is line 3 minus line 6. If a health or retirement benefit is left off line 3 it cannot be subtracted on line 4, and the taxable wages on line 7 come out wrong.
Payment method does not matter
The instructions say the method of payment does not determine whether payments are wages. Hourly, daily, weekly, monthly or yearly pay, piecework and a percentage of profits all count when they are wages.
Successor employers
The instructions give an example of a successor employer. If a predecessor paid $5,000 to an employee and you then paid that employee $3,000, line 3 includes the $8,000 total for that employee. For the FUTA wage base on line 5, you may count the predecessor’s payments only if the predecessor was an employer for FUTA purposes and so had to file Form 940.
Worked example
The IRS example uses three employees paid $44,000, $8,000 and $16,000. Line 3 is $44,000 + $8,000 + $16,000 = $68,000. The $4,500 of health insurance and retirement benefits included in those pay amounts is entered later on line 4.
More pages in this set
Related decoder pages: Form 940 Line 9, Form 940 Line 11.
Sources
- Instructions for Form 940 (2025): the line-by-line and code instructions summarized on this page. Page last reviewed or updated April 30, 2026. Read November 2, 2026.
Edition: Instructions for Form 940 (2025). Line numbers, codes, dollar limits and rates are those printed in that edition and change by year. Names in worked examples are made up.
Frequently asked questions
What goes on Form 940 line 3?
The total payments you made during the calendar year to all employees, including payments that are not taxable for FUTA.
Why include payments that are exempt from FUTA?
Exempt payments are subtracted on line 4, and the instructions say you only report a payment as exempt on line 4 if you included it on line 3.
Do reported tips go on line 3?
Yes, tips of $20 or more in a month that your employees reported to you are included.
Does the way I pay people change what counts?
No. The instructions say your method of payment does not determine whether payments are wages.
Can wages be subject to FUTA but not to state unemployment tax?
Yes. The instructions caution that wages may be subject to FUTA tax even if they are excluded from your state’s unemployment tax.
Not tax advice
This page summarizes IRS instructions, mostly written for the people who prepare the form, and is not tax, legal or financial advice. A CPA, an enrolled agent or a payroll professional can confirm what a line or code means for your filing. Everything runs in your browser; nothing you enter is sent anywhere.