The Infrastructure Act Ended the Q4 Employee Retention Credit Retroactively: What Employers Who Already Reduced Deposits Must Do

Key takeaways

• IIJA § 80604 amended IRC § 3134(n) to end the ERC for wages paid after September 30, 2021, except for recovery startup businesses, which remain eligible through December 31, 2021.
• Because the law was signed November 15 — well into Q4 — employers who had reduced deposits or taken advances for an anticipated Q4 credit are now exposed to failure-to-deposit penalties under IRC § 6656.
• Notice 2021-65 (December 6, 2021) provides a safe harbor: no failure-to-deposit penalty for non-recovery-startup employers who reduced deposits on or before December 20, 2021, if they deposit the retained amounts by the due date for wages paid December 31, 2021 and properly report the liability.
• Recovery startup businesses are unaffected. They keep the Q4 2021 credit, capped at $50,000 for the quarter.

What the Infrastructure Act did

The Employee Retention Credit was, until last month, scheduled to run through the end of 2021. The Infrastructure Investment and Jobs Act (Pub. L. 117-58), signed November 15, changed that. Section 80604 amended IRC § 3134(n) so that the credit applies only to wages paid before October 1, 2021 — except for an employer that is a recovery startup business, for which the credit continues through December 31, 2021. The effective-date provision makes the change apply to calendar quarters beginning after September 30, 2021.

In plain terms: for most employers, the fourth quarter of 2021 is no longer an ERC quarter. The credit they may have been counting on for October, November, and December is gone, and it is gone retroactively to the start of the quarter.

The retroactivity is the whole problem. A change announced in mid-November that reaches back to October 1 lands on employers who had already acted on the prior law.

The trap: deposits already reduced

Under the IRS guidance in effect through the fall, employers were permitted to fund an anticipated ERC by reducing their federal employment tax deposits — keeping the cash rather than depositing it, on the expectation that the credit would cover it. Smaller employers could also request advance payment of the credit on Form 7200. Many did both, in good faith, for the fourth quarter.

Now those reductions and advances are not backed by a credit. The retained amounts are employment taxes that were due and not deposited, which exposes the employer to a failure-to-deposit penalty under IRC § 6656, and any advance received for Q4 is an erroneous refund that has to be repaid. An employer that did exactly what the prior rules allowed is suddenly out of compliance through no fault of its own — unless it acts on the relief the IRS has now provided.

The Notice 2021-65 safe harbor — and its deadlines

On December 6, the IRS issued Notice 2021-65, which modifies the earlier ERC guidance to address precisely this situation. It gives non-recovery-startup employers a way out of the failure-to-deposit penalty, but the relief is conditional and time-bound.

For deposits due on or before December 20, 2021, with respect to fourth-quarter wages, an employer that is not a recovery startup business will not be subject to a § 6656 penalty if all three of the following are true:

1. The employer reduced its deposits in anticipation of the ERC consistent with the rules in the prior guidance (section 3.b. of Notice 2021-24); 2. The employer deposits the amounts it initially retained on or before the relevant due date for wages paid on December 31, 2021 — regardless of whether it actually pays wages on that date — with the specific due date depending on the employer's deposit schedule; and 3. The employer reports the resulting tax liability on the applicable employment tax return or schedule covering the period from October 1 through December 31, 2021.

Two dates do the work here. The relief covers reductions taken on or before December 20, 2021; the IRS has said it will no longer waive failure-to-deposit penalties for non-recovery-startup employers who reduce deposits after December 20 in anticipation of the credit. And the cure — actually depositing the retained amounts — must happen by the due date tied to the December 31, 2021 wage payment. An employer that retained Q4 cash but does not redeposit it by that due date falls outside the safe harbor.

A practical wrinkle: if the retained amounts reach $100,000 or more, the next-day deposit rule can accelerate the deposit obligation. Larger employers should confirm their specific due date rather than assume the ordinary schedule.

Advances taken on Form 7200

The treatment of advance payments is parallel and equally strict. An advance payment received for the fourth quarter that exceeds the credit the employer is now entitled to is an erroneous refund that must be repaid. A non-recovery-startup employer that received a Q4 advance must repay it by the due date for the applicable employment tax return covering the fourth quarter. Failure to repay by that date can result in failure-to-pay penalties under IRC § 6651. Employers who filed Form 7200 for Q4 should treat repayment as a hard deadline, not a loose end.

Employers who fall outside the safe harbor

Not every employer will fit the safe harbor — for instance, one that reduced deposits after December 20, or cannot complete the redeposit in time. Notice 2021-65 addresses them too, though less generously: an employer that does not qualify for the relief may respond to a penalty notice with an explanation, and the IRS will consider reasonable-cause relief under § 6656(a). That is a worse position than the safe harbor — it is discretionary and reactive rather than automatic — so the better course is to qualify for the safe harbor where it is still possible. Employers that cannot should also correct their going-forward deposits promptly to avoid compounding the exposure.

Recovery startup businesses are unaffected

One group keeps the Q4 credit. A recovery startup business — generally, a business that began carrying on a trade or business after February 15, 2020 with average annual gross receipts not exceeding $1 million — remains eligible for the ERC through December 31, 2021, capped at $50,000 for the quarter. The Infrastructure Act preserved their Q4 eligibility and, for the fourth quarter, removed the requirement that they otherwise qualify through a suspension or revenue decline. Recovery startups should continue their Q4 claims; the termination and the redeposit scramble do not apply to them.

What to do now

This is a time-sensitive compliance exercise, and the window is the back half of December. Most employers should confirm whether they reduced any Q4 deposits or took a Q4 advance in anticipation of the ERC; if so, calendar the deposit due date tied to the December 31, 2021 wage payment and redeposit the retained amounts by then to land inside the Notice 2021-65 safe harbor. Repay any Q4 Form 7200 advance by the due date for the fourth-quarter return. Report the Q4 liability correctly on the applicable employment tax return. And separate the recovery startups in your client base — they keep the credit and should not be swept into the redeposit work. The penalty here is avoidable, but only by acting before the year closes.

FAQ

Is the Employee Retention Credit still available for the fourth quarter of 2021? No, for most employers. The Infrastructure Act ended the credit for wages paid after September 30, 2021. Only recovery startup businesses remain eligible for Q4, capped at $50,000 for the quarter.

I reduced my deposits expecting a Q4 credit. Will I be penalized? Not if you fit the Notice 2021-65 safe harbor: reductions taken on or before December 20, 2021, redeposited by the due date for wages paid December 31, 2021, with the liability properly reported. Miss those conditions and you face a failure-to-deposit penalty unless the IRS grants reasonable-cause relief.

What if I received an advance on Form 7200 for Q4? Repay it by the due date for your fourth-quarter employment tax return. An advance you are no longer entitled to is an erroneous refund, and failing to repay it on time can trigger failure-to-pay penalties.

Are recovery startup businesses affected? No. They keep the Q4 2021 credit and are outside the termination and the redeposit relief. The Q4 credit for a recovery startup is capped at $50,000.