You have what is known as a “nonqualified deferred compensation“ plan, or NQDC. Although this does not help you file your tax return, I did find this information from the IRS which indicates two things.
1. The employer was required to pay Social Security and Medicare tax at the time you performed the work that resulted in you earning this money, even though it was not paid to you at that time.
2. The employer is required to withhold income tax at the time the money is actually paid to you.
https://www.irs.gov/businesses/corporations/nonqualified-deferred-compensation-audit-techniques-guid...
If your employer was doing this correctly, they would reduce the compensation paid to you by the amount of the Social Security taxes, and they would withhold income tax. For example, if the amount of deferred compensation was $1000, the employer would actually pay you $923, because they already withheld and paid the $76.50 of Social Security and Medicare tax. Then, they would give you a W-2 that shows $935 of gross wages in box 1, some amount of federal tax withholding in box 2, and boxes three through six would be blank or zero.
Because we don’t know if the employer already paid the Social Security and Medicare tax, I don’t think we can assume that they did, since they are not paying the rest of the deferred compensation correctly. I would also say that your employer should be responsible for the penalty that you paid, and not you, because they were required to withhold income taxes.
We can tell you how to fill out a form 8919 for uncollected Social Security tax, but it isn’t really meant for this situation. Depending on how much money is involved and how much longer this arrangement is going to go on, you may want to see a professional accountant and discuss this with your former employer or file a complaint with your state labor board.
When you enter the 1099–MISC, there should be a listing of special circumstances, and one of those circumstances should say something like, “my employer gave me a W-2 and 1099 and this income should have been on my W-2“. That will cause TurboTax to fill out form 8919 so that you can pay the employee half of Social Security and Medicare. It is likely that you will again owe an underpayment or late payment penalty if you did not have income taxes withheld from this money during the year.
There is also a way to appeal this penalty, although the best appeal is the “first time“ appeal, which you would have to use with relation to the first time you were charged this penalty and not this year.
If this relationship is going to continue and you are not going to take steps to correct the matter with your employer, then you should start making estimated tax payments to avoid future penalties.
