This is one of the most common panels that needs replacing on a bug. Often the area looks like that in the first 2 pictures below, but can be as bad as that in pic 3. Doing this panel properly is getting harder as the quality of repair panels available is getting much worse. These are often the wrong length and shape. You also need to weld up the front corner of the panel to create the corner where it meets the door. If your inner wing has gone & the wing bolt hole/bumper hanger area is looking ropey it's much quicker and easier to fit a complete rear quarter from vw heritage as we did to the '72 bug. With the smaller repro panels you get a side of the heater channel on the bottom of them. cut this off the bottom of the panel but leave a bit of the vertical bit as this is welded to the side of the heater channel.
It's very important to get this panel correct as it can let down an otherwise good car. Once the rot is cut out, trim the panel back to size and  lap the top edge with a joggling tool (pic 4 below) to ensure a nice fit (pic 5 below). Remember - measure twice cut once. You don't have to use the whole panel - if you only need a small bit at the bottom cut that out - it'll take less work finishing it (pic 6). If the bottom of the B post is ok, don't cut it away, but trim down the panel so that it joins on the flat edge of the side panel (pic 7 below)

Once it's ready to go in, tack the panel in a few places (ends & middle - pic 8 above) and refit door, rear wing and running board to make sure all the holes and panel gaps lign up and that the panel sits level at the bottom (pic 9). Also, make sure the bottom of the panel is level with the bottom of the door, otherwise the car will never look right. 
When welding across under the window, go very slowly doing a little at a time and dab the weld straight-away with a wet rag to keep the heat and distortion to a minimum. Do a tiny bit at one end, then a bit in the middle then a bit at the other end. Eventually they'll all join up with hopefully little distortion.

You will then need to clean the surrounding area back to bare-metal, grind down the welds (pic 10) and apply a small amount of filler to cover the weld. Take your time doing this - don't grind through the panel and when fillering take your time to produce an invisible join. Bare-metal the whole area that will be covered by filler (all the replacement panel and a few inches above and below the panel join). This might sound a lot of filler to start with but most of it will be sanded off. Mix up the filler and apply it in long strokes to get a smooth finish. When sanding it down you'll probably find you need to add a second lot in a few small places if  there are low spots. Take your time with the sanding 240 grit is good for basic shaping, then go over it with 320/400 and apply the primer, 600/800  then topcoat. You should hopefully end up with an invisible repair like this: