Gross Income for Tax purposes

Can an employer add money in the terms of income or as a bonus to your yearly W-2 that you received in a previous year?

My question comes from my current situation, I am getting ready to graduate from college and I signed a contract with my future employer to give me a scholarship of $4000/year. The terms of the contract is that they would forgive $4000/year for each year that I worked for them. At the end of my college career if I chose not to work for them then I would owe them the full amount plus 8% interest from the date of origination. Now, in talking with a current employee that took the same scholarship then informed me that the company added $4000 on to their W-2 in the form of a bonus. This occurred for 4 years.

My other question is, is this legal?

It seems legitimate to me. If they loaned you $4000, it is a loan that you can repay, it is not W2 taxable income, at least not initially. But if you never repay a loan, and it becomes a forgiven debt at some future point in time, then it becomes taxable to you at the time it becomes a forgiven debt.

Accordingly, each year that they forgive $4000 worth of loans to you, it is essentially becomming income to you in that year. It is really no different than you repaying $4000 each year, and then the employer just adds another $4000 to your salary to even it out.

Anything considered a salary to you, including cash, or any taxable fringe benefits (such as a forgiven loan) should really be reported on your W2.

I guess that makes sense, but I wish the company would have disclosed that they would add the $4000 as a bonus. My frustration is that, I will be making close to six figures if not six figures next year and this $4000 just increases the possibility of getting heavily taxed.

Rxdoc,
It should not matter to you whether or not they call it a bonus. You would pay the same tax on $4000 of income regardless as to whether they call it a bonus, a salary, vacation pay, sick pay, hourly pay, or any other choice of words. At the end of the day, the tax you will owe on this $4000 will be based on your marginal tax rate anyway. Really, the government does not care what you or your employer calls this income. It is just taxable income to the government, and will be taxed accordingly.

Adding $4000 on top of a six figure income is not going to increase the possibility that you will be heavily taxed. At six figures, you are pretty much guaranteed to be heavily taxed anyway.

Look at it this way, you could've had worse problems.

The employer is right to include the $4,000 on the W-2.

Rxdoc may be able to claim a tuition and fees deduction for qualified education expenses up to $5250. See IRS Pub 970, Tax Benefits For Education.