The IRS website (https://www.irs.gov/individuals/certain-medicaid-waiver-payments-may-be-excludable-from-income) states:
Q11. I received wage payments that are excludable from gross income
under Notice 2014-7. However, the agency that pays me treats me as an
employee and continued to withhold federal income tax on the payments
and reported the payments as wages in box 1 of Form W-2, Wage and Tax
Statement. How should I report to the Service that the payments are
excludable from gross income?
A11. If you are not able to obtain a Form W-2c, Corrected Wage and
Tax Statement, from the agency reporting the correct amount in box 1 of
Form W-2, you should include the full amount of the payments reported in
box 1 of Form W-2 as wages on line 7 of Form 1040. You should then
subtract the excludable portion of the amount in box 1 on line 21 “Other
income,” of Form 1040. If you have other income reportable on line 21,
you should enter the net amount after subtracting the amount excludable
from gross income under Notice 2014-7 from the other amounts reportable
on line 21. You may need to enter a negative amount on line 21 if you
have no other income reportable on line 21, or if the amount of other
income you must report on line 21 is less than the amount excludable
from gross income. You should write “Notice 2014-7” on the dotted line
for line 21 if you file a paper return, or enter “Notice 2014-7” on line
21 for an electronically filed return.
