Please make sure they did not say it would not be EARNED INCOME.
If it is Earned Income, you pay Self-Employment (FICA) tax as well as income tax.
If it is NOT EARNED income, you still pay income tax.
If it is non-taxable, it shouldn't be reported on any form to the IRS as income.
If you were issued a 1099-NEC for non-taxable income, you could "Not report" the 1099-NEC and explain if the IRS makes an inquiry
OR
Enter the 1099-NEC as illustrated above (so it is not subject to Self-Employment tax) then make an entry to zero out the income.
If you do this, be sure you are correct to claim the income is not taxable and keep the evidence to support your claim that it is not taxable with your tax file.
Personal
Personal Income
Less Common Income
Miscellaneous Income, 1099-A, 1099-C
Other reportable income (the last option)
Type "Nontaxable portion of Settlement on1099-NEC" or similar description
Enter the amount AS A NEGATIVE NUMBER
The 1099-NEC and the adjustment will be on Schedule 1
Schedule 1 flows to the 1040 line 8
Here is a link about how the IRS wants settlements reported.
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