"The problem is that I’m fairly certain none of this compensation income
is included in Box 1 of my W-2. The ISO sales are stated in Box 14 of my
W-2, but I’m fairly certain none of the amount is included in Box 1."
You need to clear that up with your employer. Box 14 is in the main a simple "memo" box, telling employees something about their W-2. I'd expect that most commonly the information is about what's been included or excluded from Box 1. In your case the Box 14 amount should be included in Box 1, but I guess a mistake could have been made, so get that settled first.
"Since this compensation income is not included in my W-2, and Turbotax
is adjusting the cost basis of these ISO sales such that the short-term
gain is very little, how do I account for this compensation income in my
return so I don’t underpay my taxes?"
The way you do that is to work through the "Stocks, Mutual Funds, Bonds, Other" interview all the way to the bitter end. You're not done when you've simply entered all your trades. Keep pressing "done" or "continue" until a page comes up that tells you what TurboTax has calculated as compensation and asks you if that's the amount reported on you W-2, (and included in Box 1 of course). If you answer "No" here TurboTax will include that amount on line 7 of your Form 1040.
Tom Young
