: Can my employer make me to pay for their tax mistake from my future paychecks? I live and work in the same building. As part of my employee benefits, I pay no rent for my apartment. However, I pay 30% tax on the rent at

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(I am making the assumption that this is a US based question).

Keep in mind that the alternative is to amend your tax forms from 2010, and 2011. The IRS and the State will want their money, they might not to wait for 78 paychecks. That is 3 years.

Ask for lots of documentation, so you understand what they are doing.

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I assume the OP is the US and that he is, like most people, a cash-basis
tax payer and not an accrual basis tax payer.

Suppose the value of the rental of the unit the OP is occupying
was reported
as income on the OP's 2010 and 2011 W-2 forms but the corresponding income
tax was not withheld. If the OP correctly transcribed these income numbers
onto his tax returns, correctly computed the tax on the income reported
on his 2010 and 2011 1040 forms, and paid the amount due in timely fashion,
then there is no
tax or penalty due for 2010 and 2011. Nor is the company entitled to withhold
tax on this income for 2010 and 2011 at this time; the tax on that income
has already been paid by the OP directly to the IRS and the company has
nothing to do with the matter anymore.
Suppose the value of the rental of the unit the OP is occupying
was NOT reported as income on the OP's 2010 and 2011 W-2 forms.
If the OP correctly transcribed these income numbers
onto his tax returns, correctly computed the tax on the income reported
on his 2010 and 2011 1040 forms, and paid the amount due in timely fashion,
then there is no tax or penalty due for 2010 and 2011. Should the OP
have declared the value of the rental of the unit as additional income
from his employer that was not reported on the W-2 form, and paid taxes
on that money? Possibly, but it would be reasonable to argue that the OP
did nothing wrong other than not checking his W-2 form carefully: he simply
assumed the income numbers included the value of the rental and copied
whatever the company-issued W-2 form said onto his 1040 form. At least as
of now, there is no reason for the IRS to question his 2010 and 2011 returns
because the numbers reported to the IRS on Copy A of the W-2 forms match
the numbers reported by the OP on his tax returns.

My guess is that the company discovered that it had not actually declared
the value of the rental payments on the OP's W-2 forms for 2010 and 2011
and now wants to include this amount as income on subsequent W-2 forms.
Now, reporting a lump-sum benefit of K (but no actual cash)
would have caused a huge amount of income tax to need to be withheld,
and the OP's next couple of paychecks might well have had zero
take-home pay as all the money was going towards this tax withholding.
Instead, the company is saying that it will report the K as
income in 78 equal installments (weekly paychecks over 18 months?)
and withhold 0 as
the tax due on each installment. If it does not already do so,
it will likely also include the
value of the current rent as a benefit and withhold tax on that
too. So the OP's take-home pay will reduce by 0 (at least)
and maybe more if the current rental payments also start appearing
on the paychecks and tax is withheld from them too.

I will not express an opinion on the legality of the company
withholding an additional 0 as tax from the OP's paycheck,
but will suggest that the solution proposed by the company
(have the money appear as taxable benefits over a 78-week
period, have tax withheld, and declare the income on your
2012, 2013 and 2014 returns) is far more beneficial to the
OP than the company declaring to the IRS that it made a
mistake on the 2010 and 2011 W-2's issued to the OP, and
that the actual income paid was higher. Not only will the OP
have to file amended returns for 2010 and 2011 but the company
will need to amend its tax returns too.

In summary, the OP needs to know that

He will have to pay taxes on the value of the waived rental payments
for 2010 and 2011.
The company's mistake in not declaring this as income to the OP
for 2010 and 2011 does not absolve him of the responsibility
for paying the taxes
What the company is proposing is a very reasonable solution to the
problem of recovering from the mistake.
The alternative, as @mhoran_psprep points out, is to amend
your 2010 and 2011 federal and state tax returns to declare the
value of the rental during those years as additional income,
and pay taxes (and possibly penalties) on the additional
amount due. This takes the company completely out of the picture,
but does require a lot more work and a lot more cash now rather
than in the future.