Severance pay should be reported on a W-2 along with regular wages. By reporting it on a 1099-NEC, the employer is trying to make you pay both halves of Social Security instead of only the employee half, whether this is intentional or out of ignorance.
I believe in TurboTax when you enter the 1099-NEC, there is a series of checkboxes for special circumstances, and one of the checkboxes says something like “this should have been on a W-2“ or something like that. If you check that box, TurboTax will fill out a substitute W form for you, and you will pay regular income tax as well as the employee half of Social Security and Medicare, but you will not have to pay the employer half of Social Security and Medicare. Depending on the size of the severance pay, the fact that there was no federal or state tax withholding will almost certainly decrease the refund you would normally expect or increase the amount of tax you owe. If TurboTax indicates that you owe a penalty for underwithholding, decline the offer to calculate the penalty and add it to your payment. If you owe a penalty, the IRS will mail you an assessment later, and when that happens, you can appeal based on the circumstances.
If you can’t figure out how to report this 1099 as wages that should have been on a W-2, post back here and I will double check my own copy of the program to see exactly where it is.
