While all US legal entity structures are supported for Deel PEO, there are three worker types that most frequently are applied by PEO clients 

• FLSA exempt/non-exempt employees
• K-1 partners
• S-Corp 2%+ owners

Each type has specific rules around payroll setup, benefits eligibility, and tax treatment.

Worker Classification is ultimately a client responsibility and Deel cannot advise on it. This article is for informational purposes only and is not intended as tax or business guidance.

Exempt/Non-Exempt employees

Overview

The Fair Labor Standards Act (FLSA) categories employees as either exempt or non-exempt, primarily affecting their eligibility for overtime pay.

Exempt = not eligible for overtime

Non-exempt = eligible for overtime for hours worked over 40 per week

While Deel can assist clients with understanding the different FLSA classifications and provide generalized guidance, it is ultimately the client’s responsibility to correctly classify their employees.

More details

• FLSA exempt employees are salaried, typically ineligible for overtime, and often work in professional/managerial roles. 
• Non-exempt employees are paid hourly, must receive overtime for all hours over a 40 hour workweek, and are protected by minimum wage laws.

Generally, exempt salaried employees enjoy the benefits of regular, predictable payroll and have more flexibility in structuring their work week. 

Non-exempt workers benefit from extra hour overtime pay, but have less overall salary stability.

For a more comprehensive breakdown, please see our Help Center article: Exempt vs Non Exempt Employees.

K-1 Partners

Overview

K-1 Partners (typically owners in partnerships or LLCs taxed as partnerships) are not considered employees and are treated differently for benefits and payroll tax purposes.

Having a K-1 partner classification (receiving a Schedule K-1, Form 1065) means being taxed as a self-employed partner rather than an employee, offering benefits like pass-through taxation and deduction of business losses. K-1 Partners are eligible for owner’s draws, which can be added to payroll reports as needed.

Key Differences vs. W-2 Employee

• Tax Filing: Partners receive a K-1, while employees receive a W-2. K-1 partners are not eligible for Q-2 pages.
• Benefits: Partners typically pay for their own benefits, although they may participate in firm-sponsored retirement plans. All benefits must be set as 100% employee-paid. NOT eligible for Section 125 plans (FSA, HSA, Dependent Care, Transit)
• Liability: Partners face self-employment tax on their share of income, whereas employees split FICA taxes with the employer.

S-Corp 2%+ Owners

Overview

A S-Corp is a tax designation for corporations or LLCs with 100 or fewer shareholders that passes income, losses, deductions, and credits directly to shareholders to avoid federal corporate taxes.  All shareholders must be U.S. citizens or legal residents

This structure provides pass-through taxation, avoiding double taxation, but requires stricter compliance, payroll, and limits fringe benefits for owners compared to employees. 

S-Corp owners with more than 2% ownership have specific IRS restrictions affecting both benefit eligibility and tax treatment, including:

• CAN be W-2 employees on PEO
• NOT eligible for Section 125 plans (FSA, HSA, Dependent Care, Transit)
• Employer-paid GTL is taxable from the first dollar, regardless of coverage amount

Worker Classification is ultimately a client responsibility and Deel cannot advise on it. This article is for informational purposes only and is not intended as tax or business guidance.