How do I handle the employee tax setup if they claim exempt on their W-4?

From the Payroll Setup menu, select Employees
Select the employee and click Taxes
For the Tax ID FWH, Select No Tax from the Adj Method drop-down list.
Click Accept line, Accept table, Save and Close.

Note: If the intent is to have taxable income but no tax withheld, choose the tax Adj method of No Tax. No tax will be calculated or withheld but taxable earnings will still accumulate and populate on tax forms such as the Form 941 and W-2. This is the option associated with the Exempt choice on the W-4.