Windows Password
If this says "Create" then this user currently has no Windows password (the password they use to access shares and possibly log onto the domain) entry in the smbpasswd file. If you want this user to be able to access Windows File Sharing on this machine, check this box.

If this says "Update", the users Windows password (the password they use to access shares and possibly log onto the domain) will be changed along with the system password.

It is recommended to keep these passwords in sync whenever possible.