There are two things you could do in turbotax. But, we on this forum are not CPAs. If you really want expert advice you'd best pay for it.
1. Report "other income" in the amount you believe to be taxable, under other miscellaneous income or other uncommon income. (That's where box 3 income goes anyway.) Don't report the 1099-MISC separately. You may get a letter asking why you did not report the 1099, you will send back a written explanation.
2. Report the 1099-MISC box 3 income, then go to other uncommon income and create an entry with a negative number in the amount of the non-taxable part of the settlement, to offset the 1099. Label it something like "non-taxable adjustment" or whatever you think will be informative. We are hearing, although I can't confirm, that negative adjustment entries like this are blocking e-filing this year so you may have to mail your return. If you do, you might as well attach a written explanation of the adjustment (why only part of the 1099 is taxable.)
This is not a complete answer because it does not deal with the issue of social security and medicare tax that maybe should have been paid on the part of the settlement that would have been reported on a W-2 if the employer did things correctly in the first place. That really would need a CPA if you want to verify whether or not you need to pay that tax off the settlement and how to do it.
