How to I stop withholding tax from being withheld from an employee's paycheck?

Contact your tax advisor or state revenue office to verify that you are in compliance with federal, state, and local tax laws.

1. From the Payroll Setup menu, select Employees.
2. Select the employee and click Taxes.
3. In the Adjustment Method column, select No Tax for the applicable taxes.  Click Exempt if you don't want it to show on the W2.
   Note: If the tax is not listed, you can add the tax by clicking List.

DocLink: What is the difference between Exempt and No Tax Adjustment Methods?