Everything an employer pays an employee must be reported on their W-2, and is subject to income tax withholding and social security and medicare tax. This was never a tax-free gift, and the new owner is avoiding his share of social security and medicare (accidentally or on purpose) by reporting it on a 1099 instead of the W-2.
Start by asking the employer to cancel the 1099-NEC and issue a corrected W-2. If they refuse (keep copies of your correspondence), then your husband should file by entering the 1099-NEC and checking the box for "I received a 1099 and a W-2 from the same employer and this income should have been on my W-2." Turbotax will prepare a form 8919 with code H, to collect the employer half of social security and medicare (7.65%) instead of self-employment tax (15.3%). If a bunch of people do this, the employer will probably get a call from the IRS.
But you and your husband do owe the taxes.
