By making the payment to you part of your W2, they pay payroll taxes. Even though they may not "gross up", they're being pretty stupid by paying it to you as part of your salary (as a bonus, not base pay). If they were to "expense" it, then they wouldn't have to pay taxes as all (on their side or yours). Hence, my surprise is that, 1) it costs them more since they have to pay payroll taxes (which they may take into account, but they don't *have* to do it that way; 2) they're taking more of the money away from you by not expensing it. So, they're hurting everyone involved by being stupid.

Now, that's separate from the whole two-year thing, as it appears that that sort of thing is becoming more common. Personally, it's pretty rude (especially because they force you to have to do the whole ammended taxes thing), but it's their business, and they believe they're helping it out that way (which they're probably not, but that's a separate argument). Best of luck with it.

Dan