I am looking for the specific IRS guidelines that define when a spouse is no longer considered a volunteer but an employee.
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There are no guidelines. If your spouse participates in the business, you can allocate the income and expenses any way you want*; including considering him/her a "volunteer" ( 0% participant ). If you do split the business, each spouse will submit a separate schedule C, with your joint return (or separate, if you choose to file separately).
* Unless there is a deliberate attempt at tax avoidance.
There are no guidelines. If your spouse participates in the business, you can allocate the income and expenses any way you want*; including considering him/her a "volunteer" ( 0% participant ). If you do split the business, each spouse will submit a separate schedule C, with your joint return (or separate, if you choose to file separately).
* Unless there is a deliberate attempt at tax avoidance.
They are an employee when you treat them as such by issuing them a paycheck, a W-2 and file the proper payroll tax forms as required.
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