May I suggest you contact the former employer and explain the situation.
It is possible that payroll made the error and they can send you a corrected W2.
If you enter the 1099-NEC as wage income, there would be no penalty to you, but the IRS would investigate as to whether
- You are a 1099-NEC (Non-Employee Compensation) Taxpayer, in which case you would be liable for your share of Self-Employment tax
- Your former employer reported the compensation incorrectly in which case they would be liable for the tax, and perhaps penalty. This tax is part of the payments to your Social Security Account.
It would be MUCH better if you and the former employer could sort this out before the IRS gets a chance to step in.
According to the IRS:
"Is severance pay taxable? Yes, severance pay is taxable in the year that you receive it. Your employer will include this amount on your Form W-2 and will withhold appropriate federal and state taxes. See Publication 525, Taxable and Nontaxable Income, for additional information. "
IRS Link
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