Leave L & I set up as you currently have it set up. Most customers use the fixed amount option for the calculation method. This is fine. Leave the tax options as they are set up as well.

When you are done processing payroll for the year, you will need to go back into your L & I deduction setup before you run your W2’s. Change the calculation method from a fixed amount to a fixed % and then change the apply to option to Wages – Exempt income.

By changing the apply to option before printing the W2’s your L & I will now appear correctly.