The IRS does not have a place on your tax return to mark your 1099-MISC as non-taxable. This Line 21 workaround does work on tax returns. If line 21 is showing $0, and you see the description of the 2 items, one positive and one negative, then the amount must be coming from somewhere else as well. If you choose to leave the 1099-MISC off your return, just keep your records. I would try calling your attorney that you used for the settlement and tell him the employer is reporting it as taxable. It is easy for the employer to file a corrected 1099-MISC and eliminate the problem.
