All monies paid by your employer for your services must be reported on your W-2, even this allowance. Your employer is, through ignorance or intent, avoiding their responsibility to pay employment taxes, unemployment insurance and other requirements on these wages. You should ask them for a corrected W-2.
If they refuse, enter the 1099-MISC and check the box on the page of special circumstances that says something like “this money was paid by my regular employer and should have been on my W-2”. TurboTax will prepare a form 8919 and you will pay 7.65% social security and Medicare tax that should have been withheld, but you won’t pay 15% self employment tax.
