To enter it so you are not taxed, you will have to make an extra entry for a negative amount to zero it out:
Go through the same steps above but enter it as a negative:
Select Add a 1099-MISC, and input the information from your paper 1099-MISC, then select Continue.
On the Describe the reason for this 1099-MISC screen,
type in "non-taxable lawsuit settlement" and select Continue.
On the Does one of these uncommon situations apply? screen, select This was money from a lawsuit settlement and then answer the back wages question before selecting Continue.
Enter the same amount of the settlement but as a negative.
On the Other Miscellaneous Income Summary make sure you see the 2 items, one positive and one negative and Total is $0.
